Why It Matters

The U.S. economy faces six interconnected imbalances involving inflation, federal debt, trade, housing, labor and artificial intelligence that pose risks to continued economic growth and leave policymakers facing difficult trade-offs.

Federal debt is projected to reach 100% of GDP for the first time since World War II, according to a Congressional Research Service report published Aug. 21. Persistently large federal deficits have increased government borrowing costs, limited Congress's ability to respond to future crises and created a potential financial vulnerability if private investors become unwilling to finance ever-growing debt.

The Big Picture

Inflation peaked at 8% in 2022 following the pandemic and remains higher than in the decades before the pandemic. The Iran conflict has also contributed to volatile energy prices.

Federal deficits have exceeded 5% of GDP every year since fiscal 2020. Economic theory suggests that large deficits when unemployment is low contribute to higher interest rates and larger trade deficits. CRS says federal debt is projected to reach 100% of GDP for the first time since World War II and continue growing faster than the economy, which economists consider unsustainable in the long run.

The U.S. has run a trade deficit every year since 1976. President Donald Trump raised tariffs on imports beginning in 2025, yet the trade deficit has remained relatively large. Research suggests higher tariffs have been partially passed through to consumers as higher prices. Trade deficits reflect the gap between domestic saving and investment.

The U.S. labor force has declined since late 2025, a rare occurrence in the post-World War II period. The aging population has contributed to slower labor supply growth, while changes in immigration policy have reduced net migration since 2025 after four years of relatively high net migration. The labor supply slowdown has disproportionately affected industries and regions more reliant on foreign-born workers.

Since the pandemic, housing markets have seen rising prices and rents, higher mortgage rates and fewer new homes built per capita. Those trends have contributed to a modest decline in the homeownership rate, decreased housing affordability and reduced household mobility.

AI appears to have contributed to moderately higher productivity growth, driven a surge in business borrowing and investment in data centers, semiconductors and other physical capital, and fueled rising tech stock prices. However, AI has also introduced new economic risks, including the possibility of an investment bubble that could prove economically disruptive if it bursts and increased risks from cyberattacks.

The Bottom Line

The economy has been growing in line with its potential, and the unemployment rate has been relatively low since the recovery from the COVID pandemic. The presence of these imbalances does not necessarily mean a recession is likely, but CRS found they pose risks to continued economic expansion if they unwind in a disorderly way.

Inflation is primarily affected by monetary policy controlled by the Federal Reserve, though reducing federal budget deficits could make it easier for the Fed to reduce inflation. Congress has tools to bring the broader economic imbalances closer into balance, but those policies involve trade-offs that could affect other parts of the economy.

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