Every month, Hans Sterte and I write a joint “House View” of where global economics and politics are heading. This month, however, will be a bit different. I (Klas) just came back from ten days in the US, meeting people from business, politics and academia. So here is a special edition of our monthly letter, concentrating on the US.

Better than expected
The economic situation is not great, but in important respects better than anticipated. Tariffs do hurt, but the pain is not as bad as feared after “Liberation day”. The labour market is weakening, and inflation is above target; but also here economists feared higher price increases. One reason the outcome has been relatively benign is that not all cost increases have yet fed through to prices. Goldman Sachs economists assess that only half of the tariff price effects have materialised so far. If so, inflation will be sticky for another year.

Another possibility is that profit margins will take the hit. Recent forecasts from investment banks, however, expect net profits to continue to rise in 2026. Most will come courtesy of technology and finance, but other sectors will gain from the expected continued easing of monetary policy – and from layoffs to cut wage costs and projected tax cuts.

All in all, for a visiting Swede, optimism is still surprisingly strong. The Confederation of Swedish Enterprise (Svenskt Näringsliv) recently published a report, according to which Swedish companies regard the American business climate with suspicion and in some cases will wait or abstain from investments in the US, due to tariffs and political uncertainty. But when you talk to Swedish companies present in the US, on the ground, you hear the opposite: a resolve to stay and to actually double down on their American presence. The US market is simply too big and too dynamic to leave. Thus, investments in the US from the big Swedish companies are set to increase.

The near term
The outlook for next year is sprawling in all directions. Most forecasters continue to be optimistic about the tech sector. Investments are booming and AI-related capital expenditure have made up almost half of GDP growth this year. However, it is difficult to see that warp speed continue. At the same time several other sectors are anaemic. Price increases in services hold back demand, and job creation is weak. The buzz word among economists is the “K-shaped” economy, with booming tech among wide-spread weakness.

A gradual slowdown of GDP growth is the most probable result. As a result, the Fed will cut its key rate. How much? Also here, forecasts are all over. Markets hope for a more dovish FOMC, as Jerome Powell steps down and – maybe – Kevin Hassett takes the helm. But all this is highly uncertain as these cuts are supposed to take place while inflation still is higher than what the Fed aims for. As of now, the FOMC appears to be split over the appropriate rate path.

Rate cut hopes are nonetheless supporting the stock market. But we all know the vulnerabilities that come with debt, market concentration and inbreeding (companies increasingly dependent on each other and investing in each other). Also, the adaptation and spread of Large Language Models and AI agents seem to proceed at a slower clip than hoped for. Many analysts expect a setback sometime during 2026. But while financial volatility will come and some of the AI stars may suffer, the optimism about AI’s long-term blessings remain intact. Even if some companies over-invest now, and some borrow too much, the new infrastructure (grid, data centers, energy supply) will remain and benefit society for years to come. Just as happened after railway and dotcom crashes.

Another uncertainty tainting the outlook is the Supreme Court and the budget deficit. Trump’s Big Beautiful Budget Bill and the DOGE fiasco are permanenting big deficits and ensure a rising government debt. Tariffs will help fill some of the holes in the coffers – but if the Supreme Court states that Trump’s use of “reciprocal” tariffs oversteps the President’s constitutional power, the budget deficit may rise to dangerous levels.

If so, the White House will intensify its efforts to broaden the tariff fight – and employ other financial and economic weapons. Several other legal possibilities will be exploited. We will see a protracted legal battle. The administration will intensify its push for USD-backed stablecoins, hoping they will boost international demand for US treasuries – and, consequently, to press down bond yields.

Political crunch time
The President’s poll numbers have fallen and are now below those for recent presidents (including Trump1). The main reason is that many of his followers are frustrated by persistent inflation, in particular high housing costs – in stark contrast to his election promises to crush inflation. “Affordability” is the new political rallying cry. Even among the President’s ardent MAGA-supporters criticism is surfacing.

The Democrats are in disarray and have not been able to present any unified alternative to the Republicans. However, the elections earlier this fall gave both moderate and radical Democrats victories, primarily because of voter dissatisfaction with inflation and expensive housíng. The gulf between the haves and have-nots is widening. This is beginning to make some Republicans nervous. The midterm elections are less than a year away and for the Republicans to maintain their grip on Congress, inflation must come down.

Democrats of course hope that advances next year will make Trump a lame duck for the remainder of his presidency. However, one should not underestimate Donald Trump. He is a Comeback Kid and a master of social media campaigning.

Longer term risks
The economic situation looks brighter now and for the near term than what I and most economists feared last spring. But longer term, clouds are gathering. The government debt has already been mentioned: lenders may start demanding higher yields – which then could lead to a vicious spiral of rising interest costs and further weakening of investor confidence.

Another long-term challenge is the rise of authoritarianism. The White House viciously attacks media, courts, academia – and even congress. The tactic is to scare people into submission. Immigration is down, both for poor illegal immigrants and for foreign skilled workers and students. This is not only dangerous for democracy, it may also weaken productivity in the long run.

Industrial policy – in a wide sense – is here to stay. The Government (and even the President’s own family) is active in making “deals” to foster American interests. The administration seems intent to weaponize anything that might work – rates, currency, crypto – and at the same time make a private buck, if possible. Graft and corruption are on the rise. The Economist in a recent survey said that everything in Washington seems to be up for grabs. This is starting to hurt US reputation and possibly its soft power.

Which leads to a last concern: America’s security strategy. The recent update, signed by the President last month, is profoundly alarming. It sees Europe as weak and unreliable; liberal Europe faces “civilisational erasure” and does not deserve American support. Moscow has happily claimed that the strategy aligns with Russia’s vision of a world divided into spheres of interest. The US is establishing a modern version of the Monroe doctrine which saw the Americas (both North and South) as a US domain and rejects US interests and intervention in Europe. This is effectively the end of transatlantic cooperation as we know it.

All in all
The US economy has so far fared better than anticipated, despite tariffs. However, longer term tensions are easy to see. The American AI strategy is to go all in. Massive investments are seen as the tool to win the race with China and unlock huge economic gains. Success is not guaranteed, though. China’s strategy is based on smaller, cheaper and practical AI agents, backed up by subsidised capital and huge inflows of new engineers. China is also adept at exploiting the loss of US soft power in the global South. There is an obvious risk that the present American strategy hurts not only USA but the entire Western world.

On top of this we have the ballooning government debt, the introduction of new financial risks like crypto and stablecoins and a potential constitutional crisis.

So, I return to Sweden a little more optimistic about the short-term economic outlook but more pessimistic about the longer term; both economically and politically.