PUBLISHED June 28, 2026
A Confident Speech, Then a War That Changed Everything
According to economist Bruce Yandle’s analysis for the Mercatus Center, just a week before engaging Iran in war, President Trump painted a bright picture in his February 24 State of the Union address: “Inflation is plummeting, incomes are rising fast. The roaring economy is roaring like never before.” When the Trump administration launched the war in Iran on February 28, higher oil and energy prices were expected, but there was a sense the US economy was strong and vibrant enough to absorb the shock and that the conflict would end quickly. Two months later, with the war still continuing and weapon inventories being depleted, second thoughts are emerging — the economy’s heartbeat is strong but not exactly soaring.
Inflation Surges Well Past Pre-War Levels
On May 12, the Bureau of Labor Statistics reported that the April all-items Consumer Price Index had risen 3.8 percent over the prior 12 months, driven by rapidly rising energy costs, especially gasoline at the pump. Excluding food and energy, the increase was 2.8 percent — still well above the prewar 2.4 percent level and likely to rise further. The Fed-watched quarterly Personal Consumption Expenditures Index was up 4.5 percent in April, well above the fourth quarter’s 2.7 percent. Rising energy prices, in Yandle’s words, are now baked into the economy.
Fertilizer Prices Spike, Threatening Food Costs Down the Line
In late March, the cost of petroleum-based fertilizer inputs, urea and ammonia, rose 50 percent and 20 percent respectively — a warning light on the farm economy that turned red. If crop yields fall as a result of farmers cutting back on fertilizer use, consumers can expect to feel that pain later through higher food prices, a second-order effect of the energy shock that extends well beyond the gas pump and into the broader cost of living.
GDP Data Gets Revised Down, Then Up Again
There have been meaningful data reversals reflecting the prewar period. The domestic economy may not have been as strong as believed when the conflict began on February 28: the latest estimate for 2025 fourth-quarter GDP growth stood at a weak-but-positive 1.4 percent, but this was revised down to just 0.5 percent on April 9. The first estimate for the first quarter of 2026, by contrast, came in at an improved 1.6 percent, later revised further upward to 2.0 percent — suggesting a more volatile and harder-to-read economic picture than the headline numbers alone would indicate, particularly given how much the war has scrambled forecasters’ models.
On February 20, the US Supreme Court struck down the extensive tariffs Trump had imposed under the International Emergency Economic Powers Act of 1977. The ruling forced the administration to refund some $130 billion in import duties already paid by US importers, even as roughly $364 billion had been collected by the fourth quarter of 2025. Trump’s response was to immediately impose a new 10 percent tariff on all imports, then raise it to 15 percent the very next day under different legal authority — a pattern of reversal and re-imposition that Yandle argues is itself the real economic problem, since it is the unpredictability of policy, not its specific level, that most discourages business investment.
On February 20, the US Supreme Court struck down the extensive tariffs Trump had imposed under the International Emergency Economic Powers Act of 1977. The ruling forced the administration to refund some $130 billion in import duties already paid by US importers, even as roughly $364 billion had been collected by the fourth quarter of 2025. Trump’s response was to immediately impose a new 10 percent tariff on all imports, then raise it to 15 percent the very next day under different legal authority — a pattern of reversal and re-imposition that Yandle argues is itself the real economic problem, since it is the unpredictability of policy, not its specific level, that most discourages business investment.
Mercatus highlights stark evidence of America’s divided economic experience. Consumer confidence among people without a college degree fell to an all-time low in January 2026, according to the University of Michigan’s Index of Consumer Sentiment, which began tracking in 1976. The warehouse workforce, heavily affected by reduced imports, has declined by more than 50,000 workers over the past 12 months. Meanwhile, the top 10 percent of US earners now account for a record 49 percent of all consumer spending, buoyed by gains in a buoyant stock market — even as manufacturing employment in January 2026 stood at 12.59 million workers, slightly below where it had been a year earlier, despite the tariffs ostensibly designed to protect those very jobs.
In late April, the White House released its 2027 budget request to Congress, calling for massive increases in defense and border-related spending alongside continued deficit financing. Even using the administration’s own highly optimistic growth assumptions — 3.5 percent real GDP growth in 2026 and 3.1 percent in the following years — the Committee for a Responsible Federal Budget projects the annual deficit moving from $2.1 trillion in fiscal 2026 to $2.2 trillion in 2027, before only gradually declining to $1.3 trillion by 2036. As Yandle notes, if the trade deficit is genuinely the enemy, as Trump has long argued, then deficit spending must be treated the same way — since persistent government and consumer over-consumption relative to production is precisely what drives the trade imbalance the tariffs were meant to fix.
US debt has now been downgraded by all three major credit rating agencies, and the cost of paying interest on that debt is rising rapidly enough to now rival spending on national defense. Citing Cato Institute analyst Romina Boccia, Mercatus notes that the federal government’s largest obligations — Social Security, Medicare, Medicaid, and interest on the debt — are projected to consume all federal revenues within little more than a decade. The report’s underlying message is that America’s fiscal trajectory, more than its trade policy, represents the deeper structural risk to the economy’s long-term health — a risk that the current war and its associated spending pressures are only accelerating.
Mercatus highlights stark evidence of America’s divided economic experience. Consumer confidence among people without a college degree fell to an all-time low in January 2026, according to the University of Michigan’s Index of Consumer Sentiment, which began tracking in 1976. The warehouse workforce, heavily affected by reduced imports, has declined by more than 50,000 workers over the past 12 months. Meanwhile, the top 10 percent of US earners now account for a record 49 percent of all consumer spending, buoyed by gains in a buoyant stock market — even as manufacturing employment in January 2026 stood at 12.59 million workers, slightly below where it had been a year earlier, despite the tariffs ostensibly designed to protect those very jobs.
In late April, the White House released its 2027 budget request to Congress, calling for massive increases in defense and border-related spending alongside continued deficit financing. Even using the administration’s own highly optimistic growth assumptions — 3.5 percent real GDP growth in 2026 and 3.1 percent in the following years — the Committee for a Responsible Federal Budget projects the annual deficit moving from $2.1 trillion in fiscal 2026 to $2.2 trillion in 2027, before only gradually declining to $1.3 trillion by 2036. As Yandle notes, if the trade deficit is genuinely the enemy, as Trump has long argued, then deficit spending must be treated the same way — since persistent government and consumer over-consumption relative to production is precisely what drives the trade imbalance the tariffs were meant to fix.
US debt has now been downgraded by all three major credit rating agencies, and the cost of paying interest on that debt is rising rapidly enough to now rival spending on national defense. Citing Cato Institute analyst Romina Boccia, Mercatus notes that the federal government’s largest obligations — Social Security, Medicare, Medicaid, and interest on the debt — are projected to consume all federal revenues within little more than a decade. The report’s underlying message is that America’s fiscal trajectory, more than its trade policy, represents the deeper structural risk to the economy’s long-term health — a risk that the current war and its associated spending pressures are only accelerating.
