It’s fascinating to throw stones into a lake, watch ripples interact and spread, and speculate about when the water will become calm again. But when rocks and boulders of policy uncertainty hit the economic waters, predicting the outcome of the resulting ripples and waves requires more than speculation.
America’s waters are still trembling from past policy boulders, but in some ways the lake has seemed on the verge of becoming calm again following COVID and major Biden and Trump administration initiatives. Now, we must watch how new, spreading waves interact with receding ripples.
Let’s assess what we can at this point.
With the dawn of the decade and COVID, massive policy boulders fell. There were huge transfers from the national-deficit purse to individual and business bank accounts and a shutdown of the economy. The results were more like tidal waves than ripples.
The waters were still troubled in 2025 when Donald Trump returned with “golden-age” promises. In rapid fire, more boulders hit the water: DOGE cuts, government layoffs, deported immigrants and massive “Liberation Day” worldwide tariff announcements.
To get a handle on all this, there are two kinds of economic indicators to consider: soft and hard.
Soft indicators reflect what people think about the economy: Are they optimistic or pessimistic? Favoring long-run investments or sitting on their hands and waiting for fewer ripples? Hard indicators provide the data: Has GDP growth accelerated? Industrial production? Employment or business startups?
The Conference Board’s Consumer Confidence Indicator and University of Michigan’s Consumer Sentiment Index are two closely watched soft indicators. Both have multiple components, some focused on the present and others on the future. Both recently took positive turns that can be attributed to growing comfort with a more relaxed and predictable Trump tariff policy.
The Michigan index recently rose significantly for the first time in six months following “steady drops that left the preliminary number at the second-lowest level in the nearly 75-year history of the survey.” Affirming similar signals, consumer confidence rose significantly in May (but declined in June with consumers again expressing concern over tariffs).
The National Federation of Independent Businesses produces a member-derived monthly optimism index that, in June, was positive for the second consecutive month. It had languished in weak territory from January 2021 through October 2024. Finally, it seems, small businesses were observing calming waters.
Next, consider the Economic Policy Uncertainty Index, a daily measure based on the frequency of the word “uncertainty” observed in a large sample of major daily newspapers. On June 15, the index registered 521, down from a high of 976 recorded on April 5, (the first reading capturing the effects of the April 2 “Liberation Day” announcement and the highest since COVID).
Yet ripples were still present. Due to high and rising interest rates, we get a negative outlook from the National Association of Home Builders-Wells Fargo Housing Market Index, which fell from 34 to 32, the lowest reading since December 2022.
When it comes to hard indicators, the picture has been a similar mix of encouraging and uncertain.
First-quarter real GDP growth came in at minus-0.5 percent following the previous quarter’s 2.4. percent. The negative number was worsened by the efforts of U.S. importers to bring in goods before higher tariffs took hold (imports subtract from GDP). Reflecting a hangover from the same tariff-fueled spring buying frenzy, May retail sales fell 0.9 percent relative to April’s numbers.
On the labor front, May payroll employment growth of 139,000 workers was below the 149,000 average for the past 12 months but still decent. Industrial production growth declined 0.5 percent in April but rose 0.1 percent in May.
A loss of construction jobs due to high interest rates was the largest sector drag on April’s employment numbers. Tariffs seemed to be the main source of uncertainty.
More germane as a prosperity indicator, new business formations have been occurring at a sustained high level. Better still, important measures finally suggest that one ripple that has widened for a half-decade — the inflation effects of COVID — is settling and that tariff-driven inflation is for now being observed at a low level.
Yes, we seemed to be getting beyond COVID, DOGE and Liberation Day’s troubled waters when Trump decided to bomb Iran’s nuclear bomb-making activities. The Middle East now rocks with another wave of uncertainty. U.S. allies and adversaries may throw boulders of their own.
For now, we can expect volatile petroleum markets, higher energy prices and perhaps complications regarding inflation and interest rates.
Will calmer waters and peace emerge quickly, or will more boulders hit the water? We can only speculate and cannot fully account for future boulders. But many are under our control and will stop falling when our elected leaders stop dropping them.
Bruce Yandle is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University’s College of Business and Behavioral Sciences.
