Driven by an exceptionally strong fiscal stimulus and a supportive monetary policy, American domestic demand (consisting of household consumption, residential investments, business investments and government spending) soared 3.5% in the first three months of this year from the same period of 2024. That is the highest rate of growth over the last three years.

The foreign trade deficit (exports minus imports) took 1.4% off the domestic spending to give a 2.1% annual growth of American economy -- with all the complaints and unfounded estimates that the “slowing” U.S. economy is facing an imminent recession.

In fact, the GDP growth of 2.1% in the first quarter turned out to be the lowest pace of advance during the last two years owing to an extraordinary surge in U.S. demand for imports of foreign goods and services.

Washington can, therefore, justifiably claim that the U.S. started the year as the most powerful engine of global economy, contributing 1.4% of its domestic demand to jobs and incomes in the rest of the world. That is in sharp contrast with economies growing at 5% and 6% growth rates on the back of the rest of the world – i.e., adding to their wealth by selling more than buying from their global trade partners.

Strong domestic spending

Such an American largesse, however, is a big headache for White House trade officials because the U.S. merchandise trade deficit shot up 69% during the first quarter from the year earlier, with imports rising 25.2% and American export sales barely eking out a 3.6% annual growth.

And that can easily continue in the months ahead because the U.S. domestic demand remains firmly underpinned by jobs, incomes and stimulative monetary and fiscal policies.

Indeed, labor markets look good. With an unemployment rate stabilizing over the last twelve months around 4.0%, the U.S. has a fully employed economy. Even with a 2.1% GDP growth, the economy is on a non-inflationary and potential growth path determined by the stock and quality of its human and physical capital.

Incomes also look good. After tax household incomes (corrected for inflation) are growing at the fastest annual rate – 2.9% in May – since the middle of last year.

Banks’ lending to consumers is stable at about $2 trillion, and so is the Federal Reserve’s credit policy.

Jobs, incomes and credit costs are the key drivers of household consumption, residential investments and business capital outlays -- representing 90% of the U.S. economy.

That’s the state of American domestic demand in the first three months of this year.

Based on that evidence, the U.S. economy’s near-term outlook is good.

Trade problems and foreign wars

The Fed’s current credit stance over that time horizon will remain supportive given the long lags (about three to four quarters) in the impact of monetary policy on economic activity. Immediate interest rate cuts – as urged by the White House --would affect asset prices, but their positive influence on growth and employment would most likely begin to work sometime during the second half of next year.

The U.S. fiscal policy is very expansionary. The budget deficit rose 22% during the first seven months of this fiscal year (i.e., the period from October 2024 to April 2025), with government spending increasing 9%.

So, here it is: Strong labor markets, rising households’ incomes, supportive monetary policies and increasing government spending are all pointing to a sustained growth of domestic spending in the months ahead.

What can spoil the party? The answer is: Trade deficits and foreign war entanglements.

Foreign trade deficits will remain a drag on America’s economic growth. Apart from that, continuing trade disputes will negatively affect business and consumer confidence. And that’s a big issue because the external sector accounts for nearly one-third of the U.S. economy.

Trade tariffs and disruptions of supply chains will also raise inflation. That, in turn, will lower real household incomes and prevent the Fed from cutting interest rates to support private consumption, housing demand and business investments.

Washington may wish to promptly settle trade disputes with friends and allies like Canada, Mexico and the European Union – economic systems that account for 40% of U.S. transborder business transactions.

China is likely to be a more challenging trade partner, but with one-fourth of U.S. foreign trade it deserves particular attention and a rapid resolution of outstanding trade issues.

That would take care of trade problems in two-thirds of America’s overseas trades.

Foreign wars are mainly the long-standing military conflicts in the Middle East, exacerbated by escalating warfare between Israel and Iran. Peaceful solutions are possible but not very likely. The war in Central Europe seems closer to a diplomatic denouement, although that too will require a great deal of American engagement.

Trade frictions and foreign wars could greatly complicate America’s economic management in the coming months. An already difficult fiscal situation would get worse, leaving no space for monetary policy to pursue price stability and a sustained economic growth.