A slew of reports from the US this week painted a picture of an economy that is starting to look sickly.

While the Trump administration tried to depict the 3% quarterly growth Wednesday’s GDP report revealed as proof that its policies were working, it couldn’t hide the clear signs of weakness contained in the details. The rebound was merely a cyclical rebalancing of the trade that had produced the very weak first-quarter number. Once annualized to cover the first half of the year, the economy is now growing at just over 1%. Given that the last six months of 2024 produced an annualized growth rate near 3%, this amounts to a sharp deceleration of the economy.

More troubling still, the figures for consumption, exports and investment all showed rapid weakening. That would suggest that on its current course, the economy will struggle to maintain even a 1% growth rate for the remainder of the year. Adding to the sense of misery, Thursday’s PCE price index, known to be the Fed’s preferred measure of inflation, confirmed that price pressures are starting to build as Trump’s tariffs start to kick in. Weakness in the service sector is causing disinflation, but the prices on goods are rising sharply, hitting American shoppers in their pocketbooks.

Then on Friday came the employment report, which surprised to the downside. Worse than the tepid job creation in June were the revisions to the figures for May and June, which, when added up, suggested that job creation was slowing sharply.

The one bit of good news is that the unemployment rate didn’t move much, and wages kept rising. For now, workers aren’t losing jobs and real wages remain positive. But even that silver lining has a dark cloud. Owing to the Trump administration’s immigration clampdown, which is producing tales of lawnmowers left running as ICE agents swoop down on immigrants, the job supply is growing very slowly. That makes businesses reluctant to let workers go for fear of being unable to hire them back when the good times return. But that also pressures business margins at a time their input costs are rising and sales are weakening, all of which will further impede investment.

President Trump was quick to criticize “Too Late” Jerome Powell for not cutting interest rates at this week’s Federal Reserve Board meeting.  But pity the Fed, because its options aren’t clear-cut. Inflation is rising, and there are grounds to worry it will continue to worsen. Some recent research found that the already-modest share of the tariffs being absorbed by exporters has dropped to nearly nothing, leaving businesses and consumers on the hook. If the economy weakens further, businesses will probably have no choice but to suck it up, which will hit their financial health. But if the Fed stimulates the economy and demand picks back up, businesses could end up passing the costs onto consumers, driving inflation upwards.

On balance, though, the risks now favor a reduction in interest rates in the autumn, and investors are betting heavily that’s what will happen. Even then, it’s not clear that an easing of monetary policy would provide a quick restoration of the economy’s health. And if this month’s inflation report confirms that prices are indeed rising, the Fed’s headache will only get worse.

But one thing seems clear. It is time to retire the term “American exceptionalism” has come. The US is now joining the other G7 economies in the slow-growth league.

---

John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

---

China is trying to catch up with America on artificial intelligence. The Wall Street Journal has reported that Zhipu AI — one of China’s six “AI tiger” LLMs — has released a new model that can rival leading US systems, including Anthropic’s Mythos, in cybersecurity tasks such as pinpointing security bugs. While this marks a milestone in China’s drive to catch up with Western AI capabilities, strong performance on a single benchmark does not mean it has taken the lead. Chinese models still lag behind their Western counterparts in broader capabilities, such as autonomous operation. Skepticism is therefore warranted before resorting to hysterical conclusions, but complacency about the geopolitical implications of China’s AI advances would be an even greater mistake.

On the infrastructure side, Chinese AI is still constrained by access to advanced chips, with American labs way ahead in computing capacity as well as investment. Analysis from earlier this year suggests that Chinese models are likely to be at least a few months behind those in the US. But they are still continuing to make progress, or that the geopolitical importance of AI will be decided only by whose LLM has ventured deeper into the technological frontier. The practical applications of AI, countries’ to capture foreign markets, and the application of AI into the real economy will matter just as much.

Here, China may hold an advantage. As with its dominance across many critical supply chains, Beijing may not need to produce the most advanced AI systems — only those that are affordable and widely deployable. In doing so, it could consolidate global influence by supplying functional, low-cost AI at scale.

Beijing seems to be pursuing exactly that path, developing an AI “open-source” strategy that offers affordable, widely available AI models for companies and individuals to use and modify as they wish. The production of the DeepSeek AI model, which matched the performance of Silicon Valley tools such as ChatGPT at a fraction of the cost for users, created goodwill among Chinese models with developers.

The four most popular models on OpenRouter, an AI hardware platform for developers, are now all Chinese. The goal for China is not only to win the frontier-model race, but to make its systems the default layer of AI adoption across industries and global markets. For most economies, the choice is increasingly between an affordable tool they can deploy now and a more robust one that may be out of reach.

And while the countries adopting Chinese models may be exposed to political pressure and cyber threats from Beijing, safer and more capable alternatives matter little if they are unaffordable. American AI companies are already under pressure to monetize products whose operating costs are rising. If Chinese open-source models become the cheap default for startups, universities, governments and businesses across the developing world, then America’s AI lead will be eroded from below.

Perhaps more concerning for America in the long run is how AI can give Chinese manufacturing even more strength, through the ongoing integration of AI as a general-purpose technology. China’s new Five-Year Plan mentioned AI more than 50 times and includes an “AI+” action plan aimed at spreading AI across the economy.

Beijing has been pioneering automation of its critical infrastructure for years, with promising recent results in increasing warplane production capacity. In that regard, China’s open-model strategy and manufacturing dominance will reinforce each other. Cheap, adaptable models accelerate deployment across the real economy while those deployments generate real-world data and use cases that can feed back into further model improvement.

The United States should not dismiss the importance of its lead in the AI race. That lead worries Beijing, not least because a more automated Chinese economy would also become more vulnerable to AI-generated cyber threats. But nor should Washington assume that China cannot catch up with American capabilities over time.

This AI competition represents part of a broader struggle over tech supply chains and geopolitical influence. Decisions over whether to adopt US or Chinese models could produce a more fragmented global reality, with different regions relying on different cloud providers, chips and security structures. The result will likely be a global economy which is divided into competing spheres, rather than one which produces a single winner.

---

Miquel Vila is a political and geopolitical risk consultant focusing on industrial strategy, critical infrastructure and global supply chains.

miquelvilam

---