Economists’ end-of-world predictions haven’t materialized. Is it time to admit we were wrong?

Back in February, the Great Tariff Tantrum started in full swing. Canada, Mexico and other trading partners were served notice by Donald Trump that exports into the United States would be hit with 25 per cent tariffs. The chaos and confusion continued, culminating on April 2nd Liberation Day, with outrageously high tariffs on imports from virtually every country on the planet.

Economists – myself included – responded with shock. Clutching our pearls, we quickly scribbled op-eds and blogs predicting massive economic pain, deep recessions and soaring inflation in the United States.

Yet nearly 10 months into the disruption and volatility, the American economy is holding up remarkably well. A slowdown, but no recession, at least not yet. Stock markets plunged dramatically at first, but recovered quickly. Today most indices are in record high territory. Inflation and unemployment are up, but only fractionally.

We have to ask ourselves: was Trump right after all?

Before we hand out any trophies, let’s break down what has actually happened this year.

First of all, the eye-popping tariff rates announced in the Rose Garden on April 2nd have mostly not materialized. It was a lot of huff-and-puff. A lot of those tariff rates have either been negotiated lower, imposed on only certain products, or apply only after certain volume thresholds have been reached.

Goldman Sachs estimates that the actual level of tariffs has risen from approximately 2.5% before tariffs were announced, to about 10-13% by mid summer. That’s a far cry from the average 21% modelled in the tariffs announced on Liberation Day.

Secondly, inflation has not risen by as much as economists had feared because companies are still shouldering a lot of the pain. According to Goldman Sachs economists, American shoppers will bear only 55% of the tariff costs; meanwhile, companies will take on 22% through lower profit. And foreign exporters will absorb 18% by reducing prices on their goods.

All this is great news, at least for consumers. Inflation has risen by far less than originally feared.

Thirdly, the U.S. economy is being propped up by offsetting factors. The stock markets are at record highs, but not because the tariffs are inconsequential. Luckily, stocks are soaring on A.I. and tech companies – and the rally is concentrated among a small number of massive companies. Strip those out, and the stock market performance this year has been lackluster.

Also, massive deficit spending by Washington (a stunning 6% of GDP), fuelled both by tax cuts and new government spending, is pumping steroid-like stimulus into the economy. Real GDP growth is still above water this year – but not by much. And absent the federal government’s deficit spending, it would likely be flat or negative.

These three factors – tariffs actually far lower than announced, consumer prices shouldering only half the impact, and A.I. stocks and deficits keeping the economy afloat – have resulted in a far less extreme economic slowdown.

So Donald Trump cannot be given too much credit for being correct.

Still, where Trump’s instincts are right is in his belief in the overwhelming strength of America’s adaptability. Never bet against the US economy, as the old saying goes. It is a true testament to its entrepreneurial spirit, its ability to navigate difficulty, and the still-powerful draw of America’s tech and industrial base. It hasn’t been easy, but many businesses have been able to navigate their way through.

The story isn’t over, however. The two pillars holding up the American economy mentioned above (i.e, A.I. stocks and deficit spending) cannot be counted on indefinitely. The stock market euphoria is fragile; this party won’t keep going forever. If it’s a spectacular crash or a merciful correction, stock market levels will come down.

Also, the stimulus from deficit spending also cannot last, at least not in the long run. America is on a dangerous, unsustainable fiscal path.

So was Trump right about tariffs? No. Yet he should be given some credit for his belief in American ingenuity, entrepreneurial strength and flexibility. Perhaps we economists can be faulted for too easily overlooking this factor.

Tariffs remain spectacularly bad economic policy. It’s been a combination of luck, smoke and mirrors, and offsetting factors that have kept the economy chugging along.