Is the United States of America Shooting Itself in the… Neck?

(picture taken from Wix's library)

Hello everyone! I have been mentioning something in my classes for about a week and a half now and I am starting to see prominent journals and media programmes saying the same thing. Let me explain why I think that the USA might (likely) be heading towards a fairly deep recession in the next year or two (perhaps as early as six months from now).

Note that this is my analysis and is not what other Economists are necessarily saying. I have noticed these patterns and weaknesses much before I have heard about their potential consequences in the news.

Let’s start this discussion by defining what a recession actually is. A technical recession (as it is often called in Economics) is when the economy, the USA in this case, has a decline of economic activity for at least two consecutive quarters (each quarter shows the average of three month’s worth of data). This is not simply a slowing down of economic growth, this is literally a reduction in total production.

I am expecting the USA economy to see not only a decline in their economic output for at least two consecutive quarters, which would indeed qualify for a technical recession, but I am foreseeing a likely (substantial) crash of their economy, which we usually call a depression.

I am currently putting that probability to around 80%, if the government continues with its current policies. We may see a decrease of economic activity (GDP) of around 5% (initially, perhaps for a few years in a row) and an increase of the unemployment rate to close to 10%. The full effect of such a depression may take a few more years to be in place and even longer (one year) to enter our statistics, Economists call these ‘lags’.

SO! Why do I think that the United States of America’s economy will drop significantly in the coming year or two?

This is obviously an evolving situation and, as such, keep in mind when this article was published when reviewing my estimates. Things can get a lot worst tomorrow and it may even get a bit better.

First of all, the USA economy relies very heavily on domestic consumption. Trade is a thorny subject of conversation in all political debates, especially these days, but it accounts for a small proportion of total economic activity… only 24.9% of GDP when considering all trade, 14.0% for imports and 10.9% for exports, and thus only 3.1% for net imports (2024 data taken from the World Bank).

Domestic consumption can change for a number of reasons, such as people’s income (especially with the different MPCs of different groups, for the Economists reading this), preferences between foreign and domestic products, standards of living (for autonomous consumption), credit culture, interest rates, etc.

However, one very influential factor is confidence in the economy and its future, which ties in a number of factors I just mentioned. Most economists around the world look at the Consumer Confidence Index of the USA when making predictions on the state of the economy, that of the USA but often for their own country as well.

This index, shows, as the name suggests, how consumers in the USA are feeling about their personal economic situation as well as the prospect of the country’s prosperity. The confidence USA consumers have in their own economy is extremely low these days. It has been decreasing somewhat consistently since mid-2021, reaching levels close to the 2020 pandemic this year. Although AI industries are arguably booming and creating value, consumers are very gloomy about the future and show their sentiment in their consumption choices, many choosing to buy much less than usual.

This type of measurement is very often linked to recessions, sometimes very damaging ones.

The second reason I foresee a substantial decrease in economic activity in the USA is linked to those running the government.

Although government spending in that country is a smaller proportion of GDP (around a third) when compared to consumption, laws and rules (and their absence) have a tremendous impact on the whole economy. Shoutout to Professors Acemoglu, Johnson, and Robinson for their Nobel Price in Economics in 2024 linked to this specific subject.

Trump’s government is implementing very damaging changes to the way the government operates and to the priorities of government interventions. The current government shut-down is indeed a significant drag on the USA economy, with lower spending by government programmes, lower (zero) income from many government employees, and less services for those that are still open (unpaid government employees going home early, the lack of productivity due to morale).

Even without that shut-down, the direction this administration is taking the government, with policies customised to Trump’s day-to-day preferences, brings a huge amount of uncertainty to investors. Trade partners are also unsure of what this administration’s next whim will be, making them look for other trade partners, even when those new products are more expensive. Domestic producers are puzzled when looking at the Trump government complains and targeted anger delivered by social media posts.

All this uncertainty on investment, trade, labour (crack down on immigrants: citizens, residents, and illegal immigrants alike), domestic production, and threats to the independence of extremely important public institutions (such as the Federal Reserve), compounded by a lack of reliable data due to the government’s meddling in very well regarded federal statistical offices, is going to bring down investment in the country by a sizeable, and destructive, amount.

We have seen all these problems, to a much lower degree, during Trump’s first administration. These are things Economists understand very well and things that, very often (although not always), lead to painful economic hardship. I wrote another article on Trump’s economic report card of his first administration (spoilers, he failed), you can find it here: https://www.professorpro.net/post/another-trump-presidency-will-america-be-great-again.

The third reason leading me to predict a depression in the USA in the coming years is the adaptive nature of its rivals. The United States of America didn’t really have significant rivals 20 years ago but in 2025 the world is a very different place.

Political, economic, and trading rivals of the USA are taking advantage of the relative decline of the country. Each time the United States of America is getting weaker in a field or market, its main rivals step in and gain comparative advantages in those fields.

The USD (US Dollar) has lost part of its appeal (mostly gained after the second world war) and that may lead to further problems given that the USA economy is geared towards a strong currency. I explain the possible loss of importance of the USD in the following article: https://www.professorpro.net/post/2020/01/30/is-the-usd-losing-its-edge.

Other countries and/or blocks of countries are gaining grounds in IT, renewable energy, general science, and other fields while the USA government is trying to look inwards and find import substitutes (locally sources products to replace what was historically imported), with very little success in most cases.

The USA will not disappear, unless its internal conflicts implode on itself, but it is moving in a direction in which it will be less influential and less relevant to the rest of the world. I am not predicting that decline yet but that adjustment towards it may be enough to plunge the USA is a deep and painful depression (and yes starting with a recession) in the next few years.

I hope this was informative, although quite gloomy.

Thanks for reading and I wish you all a wonderful time. Don’t forget to have fun!