The current dilemma of the U.S. economy: tariff escalation, AI bubble and policy narrative are out of touch

The U.S. economy presents a highly divided picture.On the one hand, the official narrative emphasizes that growth is strong, employment is close to full employment, and inflation has stabilized; on the other hand, the real purchasing power of residents continues to decline, manufacturing employment has experienced negative growth for several months, consumer confidence is approaching historical lows, and core commodity and energy prices have accelerated again.This phenomenon of “two realities” coexisting is rooted in the comprehensive tariff policy that has been significantly upgraded since April 2025, as well as the systematic underestimation and redefinition of inflation facts by policymakers.The latest data shows that CPI rose to 3.0% year-on-year in September, a significant increase from 2.3% in April. The release of October data was delayed due to the government shutdown, further exacerbating market uncertainty.

1. Inflation reality: continued upward pressure from 2.3% to 3.0%

Data from the U.S. Bureau of Labor Statistics (BLS) show that after the implementation of comprehensive tariffs in April 2025, CPI rose from 2.3% year-on-year to 3.0% in September, and core CPI also rose from 2.8% to 3.2%.Although the official emphasis is that “inflation is under control,” the actual price pressure felt by residents far exceeds the numbers.The average increase in imported consumer goods (home appliances, electronic products, clothing, toys) is between 12% and 20%. Some auto parts directly push up the terminal price by 6% to 10% due to steel and aluminum tariffs.At the same time, energy prices have risen again after a brief low. The reason is that the United States has imposed secondary sanctions on Russian oil, resulting in a reduction of approximately 7% in actual available supply in the G7 market. Non-G7 buyers such as China and India continue to purchase large quantities at discounted prices. The global oil market is divided into a “G7 high-price zone” and a “non-G7 low-price zone”, with American consumers happening to be on the high-price side.On October 23, the U.S. Department of the Treasury announced sanctions on two major Russian oil giants, Rosneft and Lukoil, triggering a short-term surge in global oil prices of 5%, with Brent crude oil briefly exceeding US$85 per barrel.

The direct consequence of the persistence of higher-than-expected inflation is that the Fed’s interest rate cut path has been completely disrupted.In September 2025, the Federal Reserve only cut interest rates by a symbolic 25 basis points, and then stayed on hold for three consecutive meetings.On November 25, the 30-year mortgage rate was stable at 5.99%, down from 6.72% at the beginning of the year, but the housing affordability index still fell to the lowest level since 1985.Residents’ real disposable income has experienced seven consecutive months of negative growth after deducting inflation, and the savings rate has dropped to 2.7%, which is already lower than the pre-epidemic level.On the X platform, user @SaltleyGates72 pointed out that although AI investment supports GDP, inflationary pressure is eroding the purchasing power of low- and middle-income groups, causing widespread dissatisfaction.

2. The busting of the manufacturing employment myth

One of Trump’s core campaign promises during his second term was to bring manufacturing jobs back on a large scale through high tariffs.However, the actual data trend is completely opposite.From April to September 2025, the cumulative net decrease in manufacturing employment in the United States was 58,000, including a decrease of 12,000 in August and a decrease of 6,000 in September.There are three direct reasons for the decline in employment:

1. Input costs skyrocketed.After the steel and aluminum tariffs were increased by 25% and 50% respectively, the domestic steel price in the United States has exceeded the global average price by more than 30%. Companies must either bear higher costs or relocate their production lines to tariff-exempt countries;

2. Retaliatory tariffs.Canada, the European Union, Mexico, and China have successively imposed reciprocal tariffs on U.S. agricultural products, machinery, and chemical products, resulting in a sharp decline in export-oriented factory orders;

3. Uncertainty freezes investment.Industry surveys show that 78% of manufacturers list “trade policy uncertainty” as the biggest risk in the next 12 months, 68% are worried about the continued rise in raw material costs, and 54% expect weakening domestic demand.Capital spending plans were massively delayed or canceled.

At the same time, the highly anticipated “re-industrialization” did not appear in traditional manufacturing, but focused on the construction of data centers.In the first three quarters of 2025, annualized data center construction expenditures in the United States have exceeded US$40 billion, far exceeding the amount of traditional factory construction.This reflects that resources are being tilted in one direction towards the AI ​​and chip industries, while traditional manufacturing is being squeezed in a double way: it is facing the cost impact of tariffs and is unable to obtain sufficient capital and policy support.Economist Stéphane Bonhomme commented on

3. The separation between the AI bubble and the real economy

The biggest structural feature of the current U.S. economy is that capital, talent, electricity, and policies are all focused on the AI and semiconductor industries.In the first half of 2025, the total capital expenditures of the seven giants including NVIDIA, Microsoft, Meta, and Google have exceeded US$350 billion, and are expected to exceed US$700 billion for the whole year.Data center electricity consumption accounts for more than 40% of the new electricity consumption in the United States, and many states have issued warnings of power shortages.In order to ensure the power consumption of the AI ​​industry, some areas have begun to restrict the power consumption of residents and traditional industries.Harvard economist Jason Furman pointed out that AI investment contributed to 92% of U.S. GDP growth in the first half of 2025. If this item is excluded, the economy will only grow by 0.1%, highlighting the risk of a bubble.

This resource allocation pattern of “making way for AI” leads to the following consequences:

1. The financing environment for traditional manufacturing has deteriorated, and banks are more willing to grant loan lines to high-rated technology giants;

2. Rising electricity prices further push up manufacturing operating costs;

3. Distorted capital return expectations: The internal rate of return of data center projects is generally above 15%, while traditional factories are only 4% to 6%, and capital naturally flows in one direction.

If the AI industry cannot fulfill its trillion-level profit promise in the next three years, and once the growth rate of capital expenditures slows down, the United States will face the double blow of “AI bubble bursting” and “hollowing out of the manufacturing industry” at the same time, with extremely high systemic risks.X user @karliskudla warned that AI-driven CapEx has pushed the US PE10 to 40 times, similar to the peak of the technology bubble in 2000, and the risk of capital outflows has increased.

4. The paradox of fiscal stimulus: the inflation trap of tariff bonus checks

In order to ease the pressure on residents’ living costs, the government plans to issue a “tariff dividend check” of US$2,000 to each household in 2026, with a total scale expected to be approximately US$600 billion.However, with real wage growth of only 3.9% and inflation reaching 3.0%, residents will most likely use this money to make up for the purchasing power gap rather than saving.This will form a typical negative feedback loop of fiscal stimulus → demand pull → accelerated inflation → the Fed is forced to tighten.Atlanta Federal Reserve data shows that wages increased by 4.86% in August 2025, but the actual growth rate after deducting inflation was only 1.86%, especially for low-income groups.

A more serious problem is the source of financing.The US$600 billion in new deficits must be solved through bond issuance, and the current 10-year U.S. Treasury yield has risen to 4.8%. Long-term high interest rates and high deficits will form a vicious cycle.The market has begun to worry about the sustainability of U.S. debt, with the 30-year U.S. bond yield once approaching 5.2%, the highest since 2007.X platform comments such as @hc_Vnssa pointed out that although tariffs bring short-term fiscal revenue, they will amplify deficit pressure through retaliatory measures. The OECD predicts that North America’s overall growth in 2025 will be only 1.2%.

5. Double collapse of consumer confidence and actual consumption ability

The final value of the University of Michigan’s consumer confidence index fell to 51 in November, which is lower than the 50.0 level at the peak of inflation in June 2022 (when gasoline prices exceeded $5).The current economic conditions index fell to a 40-year low.Residents’ evaluation of their personal financial situation fell to the lowest level in five years, and their willingness to purchase large-ticket items dropped to the lowest level since the financial crisis.Inflation concerns and tariff uncertainty were the main drags, the survey showed.

Retailers expect nominal sales growth in the 2025 holiday season to be 3% to 4%. However, if inflation remains above 3%, actual sales growth will be zero or even negative.Walmart, Target, etc. have publicly stated that consumers are “trade down” on a large scale: switching from beef to chicken, from chicken to plant protein, and from branded goods to private brands.This downgrade will lower the CPI of some categories in the short term, but will drag down corporate profit margins and tax revenue in the long term.X user @2025Watcher criticized that the tariff policy has intensified the “transaction downgrade”, the real income of middle-class families has shrunk, and the plummeting confidence index confirmed this trend.

6. Dangerous disconnects in policy narratives

What is most alarming at present is the systematic split between official and private understandings of economic reality.Officials have repeatedly emphasized that “inflation is under control”, “economic growth is strong” and “employment is close to the best level in history”, but they cannot explain why consumer confidence, housing affordability, manufacturing employment and real wage growth have all deteriorated.This disconnect between narrative and reality is similar to a repeat of the “temporary inflation” theory in 2021, except this time even the “temporary” modifier is omitted.Commentators such as @Esaagar on

If policymakers continue to insist on the judgment that “inflation is no problem,” the Fed will be forced to face a dilemma in 2026: either it will yield to pressure and cut interest rates, causing inflation expectations to lose anchor, and the CPI will return to 4% to 5%;Either option could trigger a recession.Economic critic Joanne Hsu warned in a report from the University of Michigan that the plummeting confidence index in November reflected policy failure and the need for immediate adjustments.

Conclusion: A trapped economy and a looming inflection point

The current U.S. economy has fallen into a policy trap composed of high tariffs, AI resource misallocation, high deficit stimulus, and energy sanctions.Traditional manufacturing is being squeezed by high costs, residents’ purchasing power continues to decline, fiscal and monetary policy space is both limited, and all growth hopes are placed on a single bet of continued high growth in the AI ​​industry.The latest BLS data and X platform public opinion show that although tariffs bring short-term revenue, they also amplify systemic risks through inflation and employment losses.

Historical experience shows that when a country’s economic growth relies too much on a single technological narrative and large-scale capital expenditures, and the real economic sector generally shrinks, it often heralds the approach of a major adjustment.The Internet bubble in 2000 and the real estate bubble in 2007 were both accompanied by the official narrative that “the new economy will never decline.”Although the current AI craze is supported by real technological progress, the scale of capital expenditures, resource concentration, and valuation levels have significantly exceeded fundamental support.X user @BenjaminNorton emphasized that after excluding AI, the U.S. economy has nearly zero growth, and the bursting of the bubble will trigger a crisis.

Unless one of the following three scenarios occurs within the next six months, the probability of the U.S. economy entering a recession in 2026 will rise sharply:

1. Tariff policy has been significantly adjusted, reducing the actual tax rate on intermediate goods and consumer goods;

2. The growth rate of capital expenditures in the AI industry has slowed down significantly, releasing electricity, capital and talents to return to the real economy;

3. The Federal Reserve cut interest rates sharply regardless of the risk of inflation, temporarily covering all cracks with liquidity (but this will bury a greater crisis).

Currently, there are no signs of realization of any of the three.Therefore, 2026 is likely to be the decisive year to verify the success or failure of the current policy combination.Until then, the U.S. economy will continue to struggle between two parallel realities of “official optimism” and “civilian pain,” and the gap between the two realities is increasingly widening into an unbridgeable gap.Economists need to be vigilant and policy adjustments must be made without delay.