There was a flurry of major news last week.

Fourth quarter 2025 growth came in weaker than expected. The Supreme Court struck down most of President Trump’s tariffs. And the U.S. women’s Olympic team brought home some of the most glamorous gold medals of the Games—much to the chagrin of the Japanese, Swiss, and particularly the Canadians.

But let’s focus on the economic news.

Fourth Quarter Growth: Calm Before the Fiscal Storm

GDP growth slowed to 1.4% in the 4th quarter of 2025, a marked deceleration from growth levels in the middle of the year. Some of the weakness was technical. Auto sales softened in the final months of 2025, trimming consumption growth. At the same time, real imports stopped declining. Because imports are subtracted in the GDP accounting framework, a drop in imports makes GDP growth look higher; that tailwind disappeared in the 4th quarter.

But the largest drag came from the federal government itself. The prolonged shutdown of the government shaved more than a full percentage point off quarterly growth. Federal spending contracted sharply, and government payrolls were disrupted, directly pulling down measured output.

Paradoxically, the shutdown also temporarily improved the fiscal picture. For the 12 months of 2025, the U.S. federal deficit totaled $1.66 trillion—down from roughly $2 trillion in the prior year because of the shutdown. Given that federal debt now exceeds $40 trillion, any narrowing of the deficit might appear to be welcome news. It is not. The recent improvement is largely illusory.

First, much of the fourth-quarter spending reduction reflects wages not paid during the shutdown. Federal employees are legally entitled to back pay. As those payments are disbursed in early 2026, spending will rebound mechanically, providing a temporary boost to measured output but erasing the apparent fiscal “savings.”

Second, geopolitical risks loom. A sustained or expanded military engagement in the Middle East would significantly increase outlays at precisely the moment when the nation’s fiscal position is already deteriorating.

Third—and most consequential—the anticipated $260 billion in revenue expected in 2026 has evaporated following the recent Supreme Court decision. That revenue loss materially worsens the outlook and could push the federal deficit toward $2.5 trillion this year.

As I’ve written many times before, the federal deficit remains one of the most serious structural risks facing the U.S. economy. Debt at this scale is manageable only if interest rates remain contained and financial markets remain confident. A renewed rise in rates or even a modest fiscal shock could rapidly increase debt-service costs, compounding the imbalance.

In short, the fourth quarter’s slower growth partly reflects temporary factors, including the shutdown. And the underlying fiscal dynamics remain deeply troubling. The recent dip in the deficit is less a sign of stabilization than the calm before the storm.

With financial markets already showing signs of volatility, the margin for error is shrinking. At current debt levels, the United States does not need a calamity to trigger a fiscal crisis—only a shift in rates, confidence, or revenues. The arithmetic is unforgiving.

The Supreme Court Decision and the Tariff Reset

The Supreme Court’s decision to invalidate most (not all) of President Trump’s tariffs puts a significant dent in one of his signature policies. I call it political policy, not economic, because these tariffs were largely designed to force foreign governments or domestic firms into concessions on unrelated political issues—they were not set up to achieve clearly defined economic objectives beyond vague notions of “bringing jobs home.”

The President responded almost immediately to the Court’s ruling with a universal 10% tariff on all imports – he then raised that to 15% the next day. But this measure is limited to 150 days—and it’s a blunt instrument. It cannot be used to twist specific arms. A targeted tariff can be political leverage; a universal tariff is simply a tax, and a small one at that. Which leads to the question: Who gains from the Court’s decision? 

The knee-jerk answer is American consumers. But that rests on the simplistic assumption that tariffs are mostly passed through to U.S. households in the form of higher prices. That assumption is far less solid than many believe.

Who Actually Pays for Tariffs?

Tariffs are not good economic policy. They distort markets and reduce overall welfare. But the economic incidence of a tariff—the question of who actually bears the burden—is not the same as who writes the check to Customs and Border Protection. In 2025, the United States collected roughly $170 billion in additional customs duties from new tariffs, bringing total customs revenues to about $265 billion, up from $84 billion in 2024.

Importers pay those duties. Then they:

• Absorb some of the cost in margins.
• Negotiate lower prices from foreign exporters. 
• Pass some portion on to wholesalers, retailers, and ultimately consumers.

In addition, higher import prices create room for domestic producers to raise their own prices. That is arguably the most pernicious channel—consumers pay more, but no tariff revenue is collected.

Still, under most plausible market conditions, economic theory tells us that U.S. consumers would not bear the majority of the burden. The losses are distributed across the supply chain.

I rarely agree with Kevin Hassett—a disagreement dating back to the unfortunately timed Dow 36,000. But I do agree that the Federal Reserve report claiming consumers paid “most” of the tariff burden was weakly reasoned and inconsistent with broader market evidence.

A Back-of-the-Envelope Test

Does theory match the data? There is a simple way to test it. Look for “surprising” increases in inflation among goods categories that are heavily import dependent. Define “surprising” as 2025 price growth that exceeds 2023 and 2024.

Overall inflation in the last 3 quarters of 2025 was 2.61%, roughly the same as in the previous two years. That alone is notable. If tariffs had been broadly based and fully passed through, we would expect to see a meaningful acceleration in overall inflation. We did not.

Keep in mind: $170 billion is less than 1% of the roughly $21 trillion in U.S. consumer spending in 2025. Even if the tariffs were fully passed through, they would add less than one percentage point to aggregate prices.

But when we look closer, we can see some signs of tariff effects. Consumer goods prices rose 1.26% in 2025, compared to roughly 0% growth in the prior two years. Service inflation slowed slightly, which is why overall inflation remained stable. It should be noted that service prices continue to grow faster than goods and remain the primary driver of overall inflation despite this slight shift.

Still, for purposes of this exercise, let’s make a strong assumption: that the entire acceleration in goods inflation was driven by tariffs. The largest increases in price growth occurred in import-intensive categories: Appliances, Tools, Glassware (see Table 1 for a breakdown of shifts in the rate of inflation by goods category). In many of these segments, price growth was 8–9 percentage points faster than in recent years. By contrast, these categories showed little acceleration: Gasoline, Pharmaceuticals, Consumer IT equipment.

This makes sense given different pricing structures, global supply dynamics, and in some cases, heavy preexisting margin compression. The pattern is consistent with partial tariff pass-through—not universal, not dominant.

We can estimate the consumer burden by applying 2024 price growth rates to 2025 spending and calculating the difference between:

1. What consumers actually spent in 2025. 
2. What they would have spent under a “but-for” scenario in which prices grew at 2024 rates.

Using this simple model, the additional cost to consumers in 2025 comes out to approximately $36 billion. Even if we assume that goods inflation would have slowed in 2025 absent the tariffs, the upper bound likely lands around $60 billion.1 That is a fraction of the $170 billion in tariff revenue collected. The conclusion is straightforward: American consumers did not pay for most of the tariffs.

U.S. businesses absorbed a substantial share through lower margins. Foreign exporters absorbed another portion through negotiated price concessions. Some domestic producers gained pricing power. The burden was shared and some even benefitted.

The Broader Lesson

None of this is an endorsement of tariffs. They are inefficient and distortionary. They shift resources in ways that reduce long-run productivity. They create deadweight loss. But the narrative that tariffs are simply a hidden sales tax fully paid by American households does not align with either theory or data. 

In the context of a $21 trillion consumer economy, even $170 billion in tariff collections cannot plausibly generate runaway inflation. If anything, the 2025 data reinforce a broader point: inflation remains primarily a service-sector phenomenon, driven by labor costs, wage growth, and domestic market conditions—not by trade taxes imposed on imported goods.

By the same logic, eliminating the tariffs will not produce a surge in economic activity or consumer spending. If tariffs were never a major source of upward price pressure, then removing them will not unleash a dramatic downward correction. There wasn’t much “down” to begin with—so there won’t be much “up” on the rebound.

That said, there are meaningful negative implications from the Supreme Court’s ruling. The President’s response has been predictable: challenging the legitimacy of the Court and retaliating by imposing a new across-the-board 15% tariff on all imports under alternative statutory authority. These measures are temporary, lasting 150 days. Assuming no further escalation, tariff levels are likely to revert to something closer to their 2024 configuration by the second half of 2026.

The more consequential development will arrive later in 2026 with the scheduled review of the United States–Mexico–Canada Agreement (USMCA). There is little doubt the Administration will approach those negotiations far more aggressively than it otherwise might have. While Congress must approve any substantive changes—placing guardrails on a wholesale withdrawal—the tone of negotiations will likely harden. Mexico and Canada, for their part, may choose to delay and slow-walk discussions in hopes of pushing final decisions beyond the midterm elections. Trade policy uncertainty, even if temporary, tends to weigh on cross-border investment decisions and capital formation.

The Federal Deficit

But the most important implication of the Court’s decision brings us back to the federal budget.

The loss of tariff revenue—combined with the expected spending increases embedded in the so-called “One Big Beautiful Bill,” the fiscal catch-up from last year’s shutdown, renewed health subsidy backfills, and automatic entitlement growth—will widen the deficit meaningfully. The tariff ruling alone could add roughly $260 billion to projected deficits over the next budget window.

To be clear, the lost tariff revenue represents less than 15% of the expected 2026 deficit. It is difficult to argue that this is the single straw breaking the camel’s back. Yet fiscal sustainability is rarely undone by one dramatic event. It is eroded at the margin.

Budget watchdog groups have noted that tariff revenues were one of the few offsets helping stabilize the federal deficit-to-GDP ratio in the near term. Without them, projections shift from “flat but elevated” to “gradually rising.” That change may appear incremental—but it matters. When debt levels are already approaching $40 trillion, marginal shifts compound quickly.

In that sense, the Court’s decision does not create a fiscal crisis. But it does move the timeline forward. And in an environment where even modest interest rate shocks could materially increase debt-service costs, the erosion of any stabilizing revenue source accelerates the long-run reckoning.

(1) From a general equilibrium standpoint, we would assume that the slowing of price increases for services were actually driven in part by the higher prices of good. That would actually be an offset to the initial amount.