The US economy navigates a complex and challenging landscape with no quick fixes

Editor's note: Tang Jie is a researcher at the Chinese Academy of International Trade and Economic Cooperation under the Chinese Ministry of Commerce. The article reflects the author's opinions and not necessarily the views of CGTN.

The US economy is currently navigating a complex and challenging landscape characterized by supply-side shocks, geopolitical risks, and traditional economic cycles. According to the third estimate released by the US Bureau of Economic Analysis (BEA) on June 26th, the nation's real gross domestic product (GDP) decreased at an annual rate of 0.5 percent in the first quarter of 2025.

This decline in real GDP was driven by an increase in imports—which subtract from GDP calculations—and a reduction in government spending. These factors were partially offset by rises in investment and consumer spending, highlighting the multifaceted challenges facing the economy. The convergence of these dynamics creates a compounding effect, testing the resilience of the US economic framework.

Import surge as a key factor

A significant driver of this contraction was a sharp rise in imports, primarily consumer and capital goods. This surge is widely attributed to businesses front-loading purchases in anticipation of new or increased tariffs. While imports subtract from GDP, underlying domestic demand—reflected in consumer spending and private investment—remained relatively resilient. Data showed that "real final sales to private domestic purchasers" increased.

However, inflationary pressures persisted. The price index for gross domestic purchases rose, as did the Personal Consumption Expenditures (PCE) price index. The core PCE price index for Q1 was revised to an annualized 3.4 percent quarter-on-quarter, still exceeding the Federal Reserve's 2-percent target. A survey by the University of Michigan revealed that consumers' one-year inflation expectations climbed to 6.5 percent, the highest level since 1981.

This suggests that while the US's GDP growth slowed, inflation remained a pressing concern. Moreover, inflationary trends are worsening and taking on structural characteristics, significantly heightening economic risks and pressures.

Supply-side shocks

The anticipation and implementation of new tariffs—particularly the "reciprocal tariffs" under the Trump's administration—have emerged as major supply-side shocks. These tariffs raise costs for imported consumer goods and intermediate producer inputs, while also potentially triggering currency appreciation that undermines US export competitiveness. The Q1 import surge was a direct consequence of these policies.

Although pandemic-era supply chain disruptions have eased, new geopolitical or unforeseen events could reignite such challenges, driving up costs and restricting goods availability. Additionally, labor supply fluctuations—influenced by immigration trends and labor force participation rates—may further disrupt wages and production capacity.

Geopolitical risks

Geopolitical tensions, particularly around trade policies and international relations, have exacerbated economic uncertainty. Ongoing conflicts and shifting alliances create volatility, dampening business sentiment and discouraging investment. Consumer spending, especially on durable goods, has also been affected.

Studies indicate that consumers fear geopolitical friction could spill over into financial markets, eroding their financial security even if macroeconomic conditions initially appear stable. This anxiety may lead to more cautious spending behavior.

The risk of escalating conflicts could worsen supply-side constraints (e.g., energy security) and amplify uncertainty, further disrupting global trade and investment flows. The International Monetary Fund (IMF) has warned that such risks may suppress global economic growth, indirectly harming US performance. The Q1 GDP data reflects this strain, with exports declining amid heightened instability.

Traditional economic cycles

The US economy continues to grapple with the lagged effects of monetary policy tightening, including interest rate hikes designed to curb inflation. While the rate-hiking cycle may have ended, the full impact of these measures is still unfolding, potentially further slowing growth.

Fiscal policy concerns also loom large. The persistent federal deficit and mounting government debt pose long-term risks, as rising interest payments may divert resources from productive investments, undermining future growth and financial stability.

Economists remain divided on whether the US will achieve a "soft landing"—moderating growth without a severe recession—or face a sharper downturn. The interplay of the aforementioned challenges clouds the economic outlook.

Conclusion

The US economy faces mounting structural pressures. Addressing these challenges will require not only targeted policy interventions but also time for recovery. A sustained rebound hinges on navigating supply-side constraints, geopolitical volatility, and cyclical headwinds—a multifaceted endeavor with no quick fixes.