Trump’s Bifurcated Economy

Today’s low-hire, low-fire labor market is unusual and challenging. The unemployment rate has remained low despite the economy creating few new jobs. That combination complicates the Fed’s decisions about whether to cut interest rates or to raise them. But for workers, especially young workers who are just entering the labor force or anyone who has lost a job, the lack of hiring is a far more profound challenge.

At the same time, the U.S. economy has continued to grow. Trump’s shape-shifting tariffs have crippled job-creating investments, except for those related to AI. But consumption, buoyed by the spending of the best-off and a stock market boom, remains strong. And inequality, which you might have thought couldn’t get any worse, has gotten much worse.

Let’s take a closer look at this confounding constellation of economic effects.

The Low-Hire, Low-Fire Labor Market

On April 2, 2025, President Donald Trump announced his draconian retaliatory tariff policies. He called it Liberation Day—“our declaration of economic independence.” In the period that followed, hiring in the U.S. economy nearly came to a halt. From May through August, the U.S. economy created just 18,500 jobs per month. The previous summer, the economy had added five times that many jobs. The Wall Street Journal editors called it “The Trump Summer Jobs Stall.”

Following the end of the government shutdown, the Bureau of Labor Statistics (BLS) published its long-delayed report on September employment, followed by reports on October and November employment. The economy added over 100,000 jobs in September, lost over 100,000 jobs in October with the government shutdown, and in November added 64,000 jobs. While a marked improvement from the summer numbers, it was still well short of the 174,000 jobs per month that the economy averaged in 2024. Also, after revising its earlier estimates, the BLS reported that the economy had lost jobs in August instead of gaining them. On top of that, the November jobs numbers, like those in previous months, are likely to be revised downward in future reports.

Despite the lack of hiring, the BLS unemployment rate remained low, 4.3% in August (and 4.4% in September). Trump’s tighter restrictions on immigration and his deportations have kept the growth of the labor force in check. The stunted growth of the labor force reduced the number of jobs needed to keep the unemployment rate from rising. But beginning in October, Amazon, Verizon, UPS, and other companies announced that they were cutting large numbers of jobs. Should that trend accelerate, with relatively few new hires even after the September increase, the unemployment rate will rise rapidly. In November the unemployment rate reached 4.6%, the highest rate since September 2021.

Despite the unemployment rate, the near halt in hiring imposed real hardships. Tariff-induced job losses and federal government job cuts have pushed up the unemployment rate for Black workers from 6.1% in January 2025 to 8.3% in November 2025, the highest level since 2011.The lack of hiring has been particularly punishing for those who have lost their jobs. As of November, nearly a quarter (24.4%) of the officially unemployed (those who want a job and have looked for a job in the last four weeks) had gone more than half a year without a job. With the exception of the yet-higher number in August, that is the highest figure since February 2022. And new entrants into the labor force, typically recent college or high school graduates, are having an especially tough time finding their first jobs. Over the summer (June, July, and August 2025), new entrants made up 11.5% of the unemployed, a level not seen since the summer of 2016.

Wages, especially for low-income workers, have also taken a beating. For over four years, beginning with the recovery from the pandemic recession in August 2020, the median wage of the lowest-paid 25% of workers grew more quickly than that of the highest-paid 25%, as reported by the wage tracker of the Atlanta Federal Reserve. Since October 2024, that relationship has been reversed. In addition, corrected for inflation, the weekly earnings of all employees on private nonfarm payrolls were no higher in August 2025 than they had been in August 2020.

Tariffs, Job Creation, and Inflation

What’s brought hiring to a near halt? The available data point persuasively to one answer: Trump’s tariffs. They increased the effective U.S. tariff rate (the average tariff rate on all imported goods) from 2.4% at the beginning of the year to 17.9% at the end of October, the highest level since 1934. And the uncertainty created by Trump’s ever-changing tariffs has become an additional impediment to investment. For instance, nearly all industries in the Institute for Supply Management’s August survey reported “a slowdown from tariff uncertainty.”
Hiring has been declining since its February 2022 peak following the pandemic recession. However, after Trump’s announcement of his retaliatory tariffs in April of this year, hiring fell 3.7 times more quickly through August than it had over the previous three years. Hiring by smaller employers was especially affected.

Automatic Data Processing (ADP), the giant payroll-processing company, reported that establishments with fewer than 50 employees lost 120,000 jobs in November 2025, while establishments with 500 or more employees added 39,000 jobs.
Also, industries with greater exposure to tariffs lost jobs while employment in industries with less exposure to tariffs increased. Mining and logging, transportation and warehousing, and manufacturing (especially of motor vehicles and parts) all lost jobs in November. Despite Trump’s promise to reinvigorate manufacturing, the U.S. economy was left with 58,000 fewer jobs in November than it had in January 2025. Health care and social assistance (which includes hospital care, childcare, to assistance, and other medical and social services) added 64,000 jobs, equal to the net increase in jobs in November.

The Trump tariffs have also driven up prices. By September, the price of coffee was 18.9% higher than a year earlier and the price of Hershey’s variety packs of Halloween candy was 22.1% higher than last Halloween. Still, tariffs, at least so far, have had a more modest effect on the overall price level. A study by economists Alberto Cavallo, Paola Llamas, and Franco Vazquez estimated that the Trump tariffs contributed about 0.7 percentage points to the Consumer Price Index, increasing the August inflation rate over the last 12 months to 2.9%. (See the box on why Trump’s tariffs haven’t done more to increase the overall inflation rate.)
Nonetheless, higher prices have hit poorer households especially hard. Those households spend a larger fraction of their income than higher-income households. The Yale Budget Lab estimates that Trump’s tariffs will cut the disposable income of the poorest tenth of households by 2.7%, but that the disposable income for the richest tenth of households will be cut less than a third as much, just 0.8%.

Even the president seems to have recognized the pain inflicted by his tariff-induced inflation. In early November, Trump wrote on Truth Social, his social media platform, that “A dividend of at least $2000 a person (not including high-income people!) will be paid to everyone.” Depending on the income cut-off, the costs of his proposal would likely far exceed the revenues his tariffs will raise this year or next, according to Erica York, vice president of federal tax policy at the Tax Foundation, a libertarian think tank. On top of that, the rebate does no more than redistribute the revenue his tariffs raised by increasing the tax burden of U.S. importers and consumers. Trump then lowered the tariffs on beef, coffee, and other food and agricultural goods, conceding by his actions that his tariffs raised prices, which he had long denied.

Conspicuous Consumption and Worsening Inequality

Even with the low-hire, low-fire labor market and higher tariffs having put the kibosh on job-creating investments, the economy has continued to expand. The Atlanta Federal Reserve Bank projects that during the third quarter of 2025, real economic growth could have reached 4.1%. The pick-up in economic growth was powered by consumption by the well-to-do, and by AI-driven investment in information processing equipment that grew at double-digit levels, while other investment spending floundered, leaving most people behind.

There is real reason to worry when the president of the New York Federal Reserve Bank warns that the gulf between rich and poor risks an economic downturn, and economists are once again talking about a “K-shaped” economy. (In a K-shaped economy, the economic prospects of the well-to-do rise along the upward line of the K while those of the rest of us decline along the downward line of the K.)
The pick-up in economic growth is driven not by widespread consumer spending, but by a consumption spree of the well-to-do. By the second quarter of 2025, spending by the richest 10% of households accounted for nearly half (49.2%) of consumer spending, according to the calculations of Moody’s Analytics economist Mark Zandi. That’s higher than at any time since 1989, the year when he started tracking spending data.

Much of that spending went to what 19th-century economist and social critic Thorstein Veblen famously called “conspicuous consumption”—ostentatious displays of wealth.

Bank of America told the Wall Street Journal that credit and debit card spending on luxury goods abroad had doubled from a year earlier. And the Financial Times reported that sales of Mercedes-Benz G-Wagons, which are priced at $148,250, were up 41% from a year ago.

From the beginning of 2020 to mid-year 2025, U.S. wealth holdings increased by $63 trillion, with wealth from stocks rising twice as quickly as wealth from real estate, according to the Federal Reserve. By their estimates, the top 20% of earners now hold 87% of the value of stocks and mutual funds. And economist Zandi estimates that every dollar of wealth gain adds another five cents of consumer spending.

The economic prospects of most everyone else have been diminished. Moody’s Analytics reports that from 2020 to mid-year 2025, the personal spending of the bottom 40% did no more than keep up with inflation, even though household debt levels have increased by nearly a quarter since the end of 2019.

The overall delinquency rate on outstanding household debt is now 4.5%, the highest level since early 2020. In the third quarter of 2025, the delinquency rate on credit card debt (90 days delinquent or more) was at its highest level since 2011. And nearly 10% of all student debt has been reported as 90 days delinquent or more. Finally, a recent report from the Consumer Federation of America found that auto loan default rates are higher than at any time since 2011.

In his late October 2025 press conference, Federal Reserve chair Powell said that the Fed is hearing more and more reports of a “bifurcated economy,” one in which “consumers at the lower end are struggling and buying less and shifting to lower-cost products, but that at the top, people are spending.” You undoubtedly got that news long before he did.

Unusual and Unstable

Signs that the AI boom in the stock market is a bubble are mounting, as Jared Bernstein, the former chair of President Joe Biden’s Council of Economic Advisers, and his co-author Ryan Cummings, have warned. And economist Rebecca Patterson likened today’s economy to a Jenga tower that balances atop an increasingly wobbly set of economic supports. The Buffett Index, the ratio of the total value of stocks in the S&P 500 to Gross Domestic Product (the value of economic output) confirms that stock market values have outstripped their economic support. The index has been well above 200% since mid-year 2025. That’s much higher than it had been at the peak of the Dot-Com bubble in the early 2000s. Warren Buffett of Berkshire Hathaway, who popularized the index, warns that investing with stock evaluations that high relative to the underlying economy is “playing with fire.”

When the stock market bubble more than likely bursts, the economy will falter. High layoffs will combine with low hiring to drive up unemployment rates, and slower spending and mounting financial instability will compromise economic growth. The resulting economic hardship will be all too familiar to most of us.

Sources: “Employment Situation Summary,” U.S. Bureau of Labor Statistics, November 20, 2025 (bls.gov); ADP Research, “ADP National Employment Report for October 2025,” November 5, 2025 (adpemploymentreport.com); Guy Berger, “High Frequency Labor Market Indicators, 10/31,” October 31, 2025 (macromostly.substack.com); U.S Bureau of Labor Statistics, “New Entrants as a Percent of Total Unemployed,” Federal Reserve Bank of St. Louis, November 28, 2025 (fred.stlouisfed.org); Federal Reserve Bank of Atlanta, “Wage Growth Tracker by Wage Level” (atlantafed.org); Steve Rattner, “Growth of Personal Spending by Income Group,” @SteveRattner on X, November 11, 2025 (x.com/SteveRattner); Federal Reserve Bank of St. Louis, “Hires: Total Nonfarm,” (fred.stlouisfed.org); U.S. Bureau of Labor Statistics, “Consumer Price Index – September 2025,” October 24, 2025 (bls.gov); Nia Law, Elizabeth Pancotti, and Rachel West, “Tricks, Treats, and Tariffs: How Trump Is Making Halloween More Expensive,” The Groundwork Collaborative, October 27, 2025 (groundworkcollaborative.org); Alberto Cavallo, Paola Llamas, and Franco Vazquez, “Tracking the Short-Run Price Impact of U.S. Tariffs,” Harvard Business School Pricing Lab, October 27, 2025 (library.hbs.edu); Paul Krugman, “Leprechauns, Effective Tariffs and Inflation,” Paul Krugman Substack, October 10, 2025 (paulkrugman.substack.com); The Budget Lab at Yale, “State of U.S. Tariffs:, October 30, 2025,” updated November 10, 2025 (budgetlab.yale.edu); Erica York, Huaqun Li, and Alekesi Shilov, “Tariff Dividends Would Cost More Than Tariff Revenues Will Generate,” Tax Foundation, November 18, 2025 (taxfoundation.org); David Cohen, “Trump says tariffs to yield dividends ‘of at least $2,000 a person’,” Politico, November 9, 2025 (politico.com); Terry Lane, “Trump’s $2,000 Tariff Check Plan Could Face Key Test in Congress,” Investopedia, November 17, 2025 (investoipedia.com); Federal Reserve Bank of Atlanta, “GDP Now” (atlantafed.org); Rachel Louise Ensign, “The U.S. Economy Depends More Than Ever on Rich People,” Wall Street Journal, February 23, 2025 (wsj.com); Joanne Hsu, “Stock Ownership and Stock Price Expectations,” Survey of Consumers, October 3, 2025; The Federal Reserve, “Corporate equities and mutual fund shares by income percentile,” Distributional Financial Accounts (federalreserve.gov); Federal Reserve Bank of New York, “Quarterly Report on Household Debt and Credit 2025: Q3,” Research and Statistics Group, November 2025 (newyorkfed.org); Erin Witte & Tara Mikkilineni, “Driven to Default: The Economy-Wide Risks of Rising Auto Loan Delinquencies,” Consumer Federation of America, September 10, 2025 (consumerfed.org); “Transcript of Chair Powell’s Press Conference,” October 29, 2025” (federalreserve.gov); Jared Bernstein and Ryan Cummings, “Warning: Our Stock Market Is Looking Like a Bubble,” New York Times, October 14, 2025 (nytimes.com); Lydia DePillis, “Job Gains Disguise Weakness Beyond Service Industries,” New York Times, November 20, 2025 (nytimes.com); Rebecca Patterson, “This is How Our Economy Comes Crashing Down,” New York Times, November 17, 2025 (nytimes.com); Aaron McDade, “Stock Market At Levels That Warren Buffett Once Called ‘Playing With Fire,’” Investopedia, December 3, 2024 (investopedia.com).