Everybody expected tariff wars to trigger a recession?

First of all, I told you so. You didn't listen.

Second, I do like saying this! I have no humility. At all!

Not quite so tarrifying?

Chart R

For the US economy in 2025, perhaps no moment stands more memorable than Donald Trump unveiling his big board of tariffs on April 2. Although the “Liberation Day” announcement might have come the day after April Fools, the levies slapped on America’s largest trading partners — as well as some of its smallest — were no joke.

They upended a multi-decade trend of lower trade barriers; took America’s trade-weighted average import tariff to over 25%, its highest level in a century; and blew a multi-trillion dollar hole in the stock market as economists got doomy and gloomy. But while inflation on imported items has certainly ticked up and trade tensions with China have never fully resolved, the US economy has mostly held up okay.

Prediction markets reveal the true extent of the relief. In spring, contracts on Polymarket were changing hands that priced a ~65% chance of a recession in 2025 — a probability that soon slid on major trade deal announcements, better than expected hiring data, and softer inflation. Even the government shutdown wasn’t enough to push things off track, as rampant AI spending helped to boost meager growth in other sectors of the economy.

Looking ahead, it’s hard to see much changing at the national level anytime soon, as data centers the size of Manhattan crop up in small town America, creating jobs, infrastructure, and — maybe most importantly of all, at least for the stock market — more AI hype. As long as the models continue to get better, the AI slop keeps coming, and the market stays focused on headline progress rather than the murkier long-term economics of trillions of dollars of upfront investment, next year’s economy might look a little like this year’s. If that’s true, prepare to hear a lot more about the K-shaped economy.