By Sania Afzal
The United States economy today appears to be coasting on borrowed time. Federal debt has exploded past $38 trillion (well over 125 percent of GDP), and interest payments are surging toward $1 trillion a year – already second only to Social Security and Medicare in the budget. Such debt levels are historically unprecedented and crowd out productive investment, even as political leaders double down on fiscal stimulus. In effect, vast sums of money are trapped in financing obligations rather than fueling genuine growth. The famed investor Ray Dalio warns the country is at a “debt-induced economic heart attack” point, a sentiment echoed by many economists. Yet on paper, the economy still churns along, creating a dangerous illusion of health.
Headline GDP growth in mid-2025 was surprisingly strong – nearly 3.8 percent annualized in Q2 – but the details reveal the limits of this rebound. In fact, much of the upturn reflected a one-off swing in net exports and stockpiling rather than a self-sustaining expansion of demand. Final domestic sales growth has trailed the official GDP number, suggesting underlying consumer and business demand remains weak. Companies are plowing cash into cutting-edge projects like artificial intelligence and software, but ordinary households see little income growth. Wages have risen modestly (roughly 3–4 percent annualized), insufficient to ignite broad consumption. Even as corporate boardrooms cheer soaring profits, most Americans feel no boom. The result is a growth model built on heavy spending on intangible investments and one-off gains, not on steadily rising productivity or broad-based income growth.
The strains of this imbalance are evident across the country. Nearly half the states – roughly twenty of them – are effectively in recession or barely growing, according to recent analysis by Moody’s and others. Oil and gas producers have slowed investment, the housing market remains weak, and manufacturing – the backbone of many state economies – is flat or shrinking under high borrowing costs and global competition. Service-sector gains in health and government jobs mask a hollowing real economy. In many Midwestern and rural areas, unemployment is ticking up quietly, even as the national jobless rate hovers near 4.3 percent. These regional divergences underline how uneven U.S. growth has become: booming corporate sector pockets sit beside communities mired in decline.
Meanwhile, inflation has fallen from its pandemic highs, but only slowly. Core inflation (excluding food and energy) hovers around 2.5 percent – still above the Federal Reserve’s 2 percent target. Annual consumer inflation settled around 3 percent by late 2025. Interest rates remain historically high: the Fed funds rate is near 4 percent, and longer-term borrowing costs have climbed as the Treasury auctions continue to swell the debt. With debt far above 100 percent of GDP, every additional increase in rates sharply raises annual interest bills. In fact, federal interest costs have roughly doubled since 2022 and now consume a record share of federal revenues. This rising burden turns every deficit dollar into a kind of “dead weight,” diminishing fiscal space for productive policies. The deficit itself has stabilized only because of higher revenues from inflation-boosted wages and some one-time measures; otherwise, the federal budget still runs annual shortfalls approaching $1.8 trillion.
In short, debt is driving today’s growth. Instead of a virtuous cycle of rising incomes leading to rising spending and investment, the U.S. system now often works in reverse: the government and central bank pump in money (or government spending), temporarily goose GDP, and then must borrow even more. The fever of stimulus and asset purchases keeps financial markets at record highs, but the real economy – from Main Street factories to small businesses – is more sluggish than the headline suggests. With debt so high, any shock (higher long-term rates, a foreign capital pullback, a serious fiscal standoff) could further throttle spending and trigger a sharp downturn.
Policy Contradictions and Structural Distortions
An effective economic strategy should help accelerate growth where it falters, but U.S. policy over the last year has often sent mixed signals instead. The administration campaigned for more protectionist measures, raising tariffs and trade barriers on imported goods. While marketed as support for domestic industries, in practice these steps have raised costs for U.S. businesses and consumers alike. Manufacturing firms report supply-chain headaches and higher import bills; consumers have less purchasing power as retail prices climb. Instead of boosting factory output, the new trade policies have made investment more tentative.
Meanwhile, Congress increased spending on infrastructure and social programs, yet the impact on growth has been muted. With interest costs escalating, lawmakers have little room to maneuver, and even large fiscal measures tend to be offset by market fears of more borrowing. Economists observe that each additional government dollar of spending has a smaller “multiplier” effect than before: businesses cite uncertainty and debt burdens when they decide where to invest. Indeed, business investment overall is largely stagnant. Tech giants and legacy companies are hoarding cash, even as their reported profits hit record levels; non-tech industries say they are still shaken by the pandemic and trade worries. The ISM manufacturing index has been in contraction territory for most of 2025, reflecting weak orders and production.
At the same time, Federal Reserve policy has been anything but soothing. Inflation staying above target has kept the Fed from cutting rates, and financial markets are jittery over who will lead the central bank next year. High policy uncertainty has made interest rate policy less predictable. The message from Washington – “we want lower rates” – clashes with the Fed’s caution over inflation and employment. This contradiction leaves businesses unsure: is money going to stay tight or loosen? The result has been hesitation in hiring and expansion plans across many industries. In housing, for example, mortgage rates of 7–8 percent keep buyers out of the market, fueling a slump in construction. Inventories of unsold homes are piling up, and homebuilder surveys are deeply pessimistic.
Sectoral imbalances have grown sharper under these conditions. Tech and digital services continue to attract investment (cloud computing and AI spending remain hot), while traditional industries lag. Factory employment is flat and even declining in some sectors. Agriculture, facing export competition and weather shocks, has also seen incomes sag. Transportation and wholesale trade report only tepid activity. In effect, the U.S. economy is being propelled by a narrow wedge of the corporate sector, rather than a broad uplift in middle-class incomes or small businesses. This lopsided model – reliant on a few booming clusters and constant policy stimulus – looks increasingly brittle. Without significant structural reforms (tax overhaul, workforce training, and infrastructure modernization) and a clearer strategy for fiscal balance, these policy contradictions may continue to hold back sustainable, inclusive growth.
Labor Market Strains and Eroding Confidence
One of the clearest warnings of underlying weakness lies in the labor market. Official reports show the unemployment rate steady around 4.3–4.4 percent, which traditionally would signal full employment. Yet beneath this calm surface, activity is freezing up. In September 2025, a major payroll survey (ADP) reported 32,000 private jobs lost – the largest one-month drop in over two years. Employment gains have been increasingly narrow. Health care and government remain the only sectors adding substantial jobs, while construction and manufacturing both stagnate. Small businesses are hiring far less than before; an analysis by Intuit found U.S. firms with under 10 employees shed about 48,000 jobs in September alone.
Meanwhile, more workers are leaving the labor force than entering it. Youth unemployment has edged higher as young adults delay job searches in a weak market. Older workers, facing technological shifts and economic uncertainty, are increasingly retiring early or cutting their hours. Labor force participation is roughly back to pre-2020 levels, but that flat level masks turnover: discouraged workers in some sectors coexist with chronic shortages in others (for example, nursing shortages despite overall employment gains in health care). Notably, employers have announced layoffs at record levels this year – nearly a million planned job cuts – the highest tally outside of a recession. At the same time, companies are posting fewer “help wanted” ads and scaling back expansion plans. This ambivalence suggests a labor market at a standstill: job growth might not crash suddenly, but it lacks momentum.
Regionally, the job strain is uneven. Coastal states with tech hubs or financial centers still add jobs, though even there the pace has cooled. Meanwhile, many interior states — from industrial Midwestern states to parts of the South — report rising unemployment claims and shrinking workforces. Rural counties and former manufacturing towns are, again, on the losing side. This patchwork of winners and losers means that national averages tell only part of the story. In communities without a booming sector, economic life has slowed to a crawl.
If workers are losing faith in the economy, businesses and investors are not far behind. A more insidious development is the decline in institutional confidence. In recent months, there have been public clashes over economic data and policymaking. The Trump administration’s firing of the Bureau of Labor Statistics chief after a disappointing jobs report has alarmed economists who fear political pressure on statistics. At the Federal Reserve, a board member’s resignation has highlighted concerns about interference in monetary policy. Even Federal Reserve officials are talking privately about relying on anecdotal or private data (the so-called Beige Book) because official figures are seen as unreliable or outdated. Each such incident erodes trust: if business leaders and foreign investors believe that U.S. data and policy are politicized, they will demand higher risk premiums – raising the cost of everything from corporate loans to mortgage rates.
On the global stage, confidence in the U.S. economy and its currency is faltering. The dollar, which rallied early in 2025 on safe-haven flows, has weakened by about 10–15 percent against major currencies since mid-year. Money managers cite worries about America’s huge budget deficits and internal divisions over monetary policy. An October 2025 Reuters survey found many analysts expect the dollar to fall further over the next year. This slide reflects a broader narrative: after decades of “dollar dominance,” rivals are questioning whether U.S. policy leadership is still reliable. The erosion of dollar credibility is more than just an exchange-rate story – it signals that the world sees America’s growth model as shaky. When the world’s investors start to doubt the stability of the U.S. framework, borrowing costs rise and long-term planning becomes fraught.
In sum, the U.S. economy is “spinning its wheels” despite appearances to the contrary. Beneath mildly positive national statistics lurk deep contradictions: mounting debt on one side, policy confusion on the other, and a workforce that is only inching forward. Regional recessions, sectoral stagnation, and questions about the independence of policy institutions all point to a system under strain. Without fundamental reforms – a credible plan to stabilize debt, regain price stability with low unemployment, and restore confidence in institutions – these short-term booms will not translate into lasting prosperity. The United States now faces a stark choice: continue with its current debt-fueled, stop-and-go approach and risk an abrupt reckoning, or undertake a serious overhaul of its economic governance to revive sustainable growth.
About the Author:
The author is associated with the Islamabad Policy Research Institute. She can be reached at saniaafzal178@gmail.com
