Over the last month, the United States has incurred a series of economic shocks.  Economic shocks happen when there are sudden, dramatic changes that cause significant disruptions to the outlook. The last major economic shock was five years ago at the beginning of the COVID pandemic, which caused massive disruptions to employment, business conditions, and the broad economy.

Now, a series of sweeping policy changes by the Trump administration have sent a new wave of shocks through the economy. Federal Reserve Chairman Jerome Powell has cited tariffs, immigration, fiscal policy and deregulation among significant policy shifts causing heightened levels of economic uncertainty.

Economic shocks are difficult to quantify and understand in real-time because economic data is backward-looking. Even the most current data — like the jobs report and inflation reports — reflect conditions from months before. And the Gross Domestic Product, the broadest measure of the economy, is only released on a quarterly basis. As the saying goes: economic forecasting is like driving a car blindfolded while getting directions from someone looking out the rear window.

In the current environment, economists have shifted to evaluating the state of the economy by looking at soft economic indicators, which often reflect short-term trends. This includes measures of consumer confidence, weekly unemployment insurance claims, and indicators of financial stress. While these soft indicators can reflect current market and economic conditions, they are volatile and can send false signals, so analysts must be cautious about giving any indicator too much weight.

At a recent press conference, Chairman Powell noted that while recent survey data show a “significant rise in uncertainty and significant concerns about downside risk” among consumers and businesses, measures of consumer sentiment don’t always match up with actual economic activity.

“There have been plenty of times where people are saying very downbeat things about the economy and then going out and buying a new car,” he said.

It’s difficult to predict how recent policy changes will affect the economy. U.S. Treasury Secretary Scott Bessent describes this as a necessary economic “detox” period. He argues that markets have become too reliant on strained global supply chains and on government spending that is financed by ever increasing federal government debt.

Proponents of this new policy believe it will protect domestic industries, generate revenue and encourage more investment. Critics warn of higher consumer prices, escalating trade wars and market distortions.

Economic models often fail to reflect the dynamic influences of trade negotiations and can misrepresent the true economic impact. Similarly, forecasting the long-term impact of policy changes to immigration, deregulation, and fiscal policy is inherently complex due to the interplay of unpredictable factors like economic fluctuations, behavioral responses, global events, and evolving political landscapes. 

While we have recently shifted into a period of greater uncertainty and risk, it is important to remember that the U.S. economy remains sound. The American economic engine is fueled by strong consumer spending, free markets, and bold entrepreneurs who are willing to take risks. Americans enjoy freedoms of expression, movement, and private property rights that are the envy of the rest of the world. While we are currently weathering an economic storm, I remain optimistic about the fundamental strength and long-term success of the American economic engine.