A record trade gap with nothing to blame it on
The total trade deficit for August came in at $105.6 billion. Forecasts called for $99 billion, and the top of the estimate range was $103 billion, so the number beat even the high guess. The low estimate was $83.8 billion. July's deficit, first reported at $88.6 billion, was revised up to $92.8 billion.
The total trade deficit includes the goods (merchandise) deficit but runs smaller because the US runs a surplus in services. That service surplus is far too small to cover the large goods deficit.
August was the fifth biggest monthly trade deficit on record. Strip out the outliers and it becomes the worst ever. The only four bigger months were the first three months of 2025, when importers rushed goods in before tariffs took effect (front-running), plus one month in 2021 when the economy reopened after the COVID shutdown and goods held back by closed ports finally flooded in. Both sets of months were shaped by one-off events. August had no such event. That is what makes it the worst "clean" deficit, and that is what makes it more dangerous - there is no obvious crisis to point to.
One factor: capital goods imports hit a record high in August. A lot of that is equipment for the AI buildout and data centers, gear the US does not make itself, so it gets imported. AI investment may actually widen the external imbalance rather than shrink it.
Tariffs raised prices but did not cut buying
Tariffs exist to lower trade deficits. Trump named trade deficits as a big problem but treated them as the problem itself rather than as the result of a deeper problem - putting a band-aid on a cancer. The plan was to make imports costlier so Americans would buy domestic, and so firms would reshore manufacturing and rebuild supply chains.
That did not happen. Total imports in August hit an all-time record, not just capital goods. Imports are higher than ever despite the tariffs. The tariffs raised the cost of imports but did not reduce the amount bought - buyers just paid more. Consumers absorb the penalty. The policy did not meet its stated goals, yet Trump and other Republicans keep calling it a great success and talk up reshoring and investment that does not show up in the trade numbers. Protectionism can create inflation without rebuilding production capacity.
Trade deficits are losses in Trump's own framing - he equates them to a corporate loss. By that measure, losses are bigger on his watch than under any prior president. Trade also did poorly in his first term. The deficit will likely keep getting worse through the rest of this year and into next year, probably producing bigger trade deficits than under any president before him.
Inflation is rising, not falling
The ISM services index slipped in September. It did not crash and stayed above 50, so no technical contraction. It was 55.4 in August, forecast to dip to 55, and came in at 54.9.
The bigger concern is the prices-paid part of that report. It rose from 72.6 to 74, the highest since July 2022. That earlier peak came about five months after the Russia-Ukraine war began, which drove up oil and other commodity prices. In the latest survey, 17 industries reported rising input prices and none reported falling prices. Inflation, even by the government's own measures, is higher now - yet Trump still claims a win on inflation. The result is a bad mix: worsening trade plus rising inflation, which eats into buying power while officials claim progress.
Bond market and the rally
The 10-year US Treasury yield sits at 5.28%, down from a high near 5.35% reached last week or Monday morning. The 30-year yield is 5.66%. Yields have barely pulled back from their highs. That small slip in rates may have helped stocks rally - about 69% of stocks rose that day, slightly broader participation than usual. But rising bond yields had not held back the major averages much anyway, so there was little pain to need relief from, outside the stocks that are not among the top names hitting highs.
A rising stock market can hide an economy losing ground underneath it. Markets cheered slightly lower yields while ignoring the worsening trade imbalance, which directly subtracts from GDP - the trade deficit is subtracted in the GDP math, so it will drag on the quarter.
Who is getting rich
Money is being made in AI and some stocks. Beyond that, the Trumps are doing very well across their many businesses, with customers now patronizing those businesses to curry favor with the administration. Instead of a charity like the Clinton Foundation - where donations partly ended up with the Clintons - the Trumps set up hedge funds that foreign governments pour money into. These are for-profit companies, so there is no need to pose as selling art, as Hunter Biden did.
The debt ceiling Trump could have used
A common defense is that Trump could not cut spending because not enough Republicans would go along. He at least should have tried, and instead pushed the other way by embracing the "big beautiful bill" - his own idea to bundle everything into one bill, which turned out to be a disaster.
What he could have done: veto every bill the House and Senate passed, including all continuing resolutions and every debt-ceiling increase. To override a veto, Congress needs a two-thirds vote in both chambers. So to uphold a veto Trump needed only one-third of either body - one-third of the House or one-third of the Senate - loyal to him. With his political capital, that was achievable. If neither party could override his vetoes, they would be forced to cut spending. Veto the debt-ceiling increase and they have no choice but to balance the budget.
Instead, Trump called for abolishing the debt ceiling entirely, not just raising it - wanting no limit on debt at all. The veto itself could have been the weapon to force a fiscal fight; Trump chose to remove the borrowing limits instead, making future debt easier to pile up. That raises the risk that inflation becomes the political escape valve for the debt.
Midterms and the politics
In the two years Republicans controlled Congress, all they did was run up the deficit and pass the big beautiful bill. Their chances in the midterms keep shrinking. The argument that Democrats would have been worse - that the situation would be worse had Kamala Harris won the White House and Democrats won the House and Senate - may well be true, but it is beside the point. Democrats will likely control Congress in 2027 and 2028 anyway, and will pass even bigger budgets with bigger deficits. Trump probably will not be in a position to veto them, though he should; the right move would be to veto everything the Democrats pass. Trump warned that if Democrats win there would be a depression worse than any since 1929 - and he could prevent that fate simply by using his veto pen.
Because Republicans pretend everything is booming while voters know it is not, the administration's failures make a hard-left turn easier. An open socialist can now win as a Democrat more easily, because the Trump administration has pulled the Republican party so far left that Democrats can move further left without looking as radical by comparison. Many Republicans do not see this. Many MAGA supporters think Trump is like Ron Paul or Ronald Reagan; he is nothing like either. He sits left of center, closer to where Democrats used to be than to past Republicans, yet he captured the party base, which is why no other Republican - including his cabinet - will stand up to him.
The officials who know better
The worst thing that happens if you say Trump is wrong is you get fired - this is not the Soviet Union, you can criticize your boss in America, and some jobs are worth losing on principle. Scott Bessent should resign rather than act as a cheerleader for policies he must know are wrong. When he first became Treasury Secretary he said he was laser-focused on paying down the debt and had a plan to do it. That focus has crashed into a system still expanding its borrowing. The real danger is that officials may know the fiscal problem is getting worse while publicly defending the opposite. When Treasury policy drifts toward accommodation, bondholders eventually demand higher yields, which raises financing costs and pressures long-duration assets.
