President Donald Trump and many of his supporters celebrated last week when second-quarter gross domestic product numbers were revised upward to 3.8%, well above the 3% that pro-Trump economists celebrated as “absolutely blockbuster.”
Economic growth of nearly 4% is welcome, as are the tax cuts and deregulation that helped spur it. But the White House shouldn’t pop the champagne just yet. New economic data show clouds may be forming on the horizon.
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The first figures come from the Organization for Economic Cooperation and Development, which estimates weak overall year-over-year growth for the U.S. economy in 2025 (1.8%) and 2026 (1.5%).
This is well below the average annual growth of the U.S. economy over the past 25 years, but at least it’s economic growth. Separate economic data, however, are flashing a warning that indicates the U.S. economy may be veering toward choppy waters.
According to fresh Bureau of Economic Analysis data, business spending plummeted in the second quarter, falling by an annualized rate of 5.6%.
“For the first time since the financial crisis of 2008,” economist Mark Skousen noted in the Wall Street Journal, “we’re seeing a huge gap between consumer and business spending.”
The data are clear: Consumption remains high, but business “is pulling in its horns.” This is an ominous sign. Declining business spending reduces economic output and can tip an already-slowing economy into recession.
While consumer spending grabs more headlines, business spending makes up roughly twice as much of the U.S. economy’s gross output. A sharp decline in business spending is an alarm bell. It signals less capital investment and slower job creation, as companies spend less on expanding capacity, upgrading equipment, or pursuing new projects — all of which are essential for long-term growth.
The decline in business investment can be found in specific economic sectors, including automobile manufacturing. During the second quarter, billions of dollars‘ worth of supply chain projects were “canceled, downsized or mothballed,” per Automotive News.
Reduced spending undoubtedly stems from a mix of factors, but the elephant in the room is tariffs, which have injected a historic level of economic uncertainty into the system.
Following Trump’s “Liberation Day” tariff announcement, Bloomberg’s Trade Uncertainty Index soared to a record, prompting many economists to warn that aggressive tariffs could trigger a recession if they were not lifted. These worries were far from alarmist.
Tariffs are a double whammy. They don’t just bite into corporate profits by making businesses pay a tax on imported materials. They create economic uncertainty, making it difficult to plan long-term investments and commit to new projects. The president has said repeatedly that he wants more capital investment in America. But how could a domestic manufacturer plan for, say, an appliance factory expansion when the price of imported copper could increase 50% overnight?
When companies cannot predict costs, supply chains, or access to foreign markets, they naturally pull back on investment. Hoarding cash is usually a poor business strategy, but it beats committing to projects you can’t finish or making a strategic shift that’s expensive to walk back.
It’s a cliché to say it, but markets like certainty, and Trump’s trade policy has delivered precisely the opposite. That, no doubt, is why cracks are beginning to appear in the U.S. economy, still recovering from the debacle of the COVID-19 pandemic, with its prolonged lockdowns and massive money-printing.
While the president and many of his supporters seem to believe his tariffs are working because the U.S. is not yet in recession, every passing month makes it clearer that tariffs are causing broad economic harm — revenue enhancements to lobbyists and swelling government coffers notwithstanding.
There’s still time to right the ship, but there’s little indication that a president who believes “trade is bad” will have an economic epiphany.
America’s founders had a very different view of trade. In the Declaration of Independence, they condemned King George III for “cutting off our trade with all parts of the world,” and rejected that kind of central control by creating a government that made the United States one large free trade zone.
Two hundred years later, in a speech from the East Room of the White House, President Ronald Reagan quoted Thomas Jefferson, who said it was the moral duty of America to “open the door of commerce and to knock off all its shackles.”
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Reagan left little doubt that he was talking about the dangers of retreating from free trade and yielding to the temptation to shield domestic industries from competition. “Protectionism in any country does damage to all,” Reagan said.
If Trump wants to be remembered like Reagan instead of President Herbert Hoover, he should abandon his protectionist crusade before it’s too late.
Jon Miltimore is a senior editor at the American Institute for Economic Research. Follow him on Substack.