The Confidence Paradox

Economic Growth Masks Eleven Risk

My Substack column of November 16 examined the apparent paradox between the robust GDP growth in recent quarters and the persistent weakness in labor markets. Another question I’ve been fielding frequently concerns another paradox: While the economy continues to grow at a healthy pace, consumer confidence remains stubbornly low.

And the University of Michigan survey of consumer sentiment has continued to fall. At 52.9 it is just above the lowest level (June 2022 at 50.0) since the survey began more than 70 years ago. During the Great Financial Crisis, consumer sentiment hit a low of 55.3 in November 2008.

This divergence between sentiment and fundamentals signals an unease about the sustainability of current conditions.

Beneath the surface of steady GDP growth and resilient employment figures, 11 significant risks are developing that warrant consideration.

Eleven Risks on the Horizon

1. Speculation in a Low-Unemployment, Low-Rate Environment

The Federal Reserve’s decision to lower interest rates while unemployment remains historically low has unleashed a wave of speculation across asset classes. We’re witnessing simultaneously elevated equity valuations, credit spreads compressed to historic lows, record highs in gold and cryptocurrencies (until they recently collapsed), and renewed fervor in meme stocks. This broad-based speculative activity echoes the conditions that preceded the March 2000 dot-com crash—a reminder that when cheap capital meets euphoric sentiment, asset pricing bubbles eventually find their reckoning.

2. The Rise of Economic Nationalism

A fundamental shift toward nationalistic economic policies—most pronounced in the United States—threatens to drag on global trend growth. The economics are straightforward: trade frictions erode productivity over time. International competition doesn’t just lower prices; it drives knowledge transfer and spurs innovation. As borders become barriers, the invisible tax of reduced efficiency accumulates silently but relentlessly.

3. Mounting Fiscal Deficits

The growing reliance on fiscal policy to support economic growth inevitably raises deficit concerns. In the near term, this manifests as steeper yield curves and elevated term-risk premia—already visible in bond markets. The more ominous long-term risk is inflation, as governments find themselves trapped between the need for stimulus and the discipline of fiscal restraint.

4. America’s Unprecedented Investment Income Deficit

For the first time since the end of the Bretton Woods system, the United States now pays more on its foreign liabilities than it earns on its overseas assets. This historic reversal in the investment balance presents two uncomfortable adjustment paths: either the dollar must continue depreciating to narrow the trade deficit, or yields must fall significantly to improve the investment income balance. Neither option is painless.

5. Food Price Pressures

Immigration restrictions, potential deportations, and tariffs on imported foods form a triple threat to food inflation. This isn’t just about grocery bills—it’s about constraining the Federal Reserve’s policy flexibility at a time when monetary authorities need maximum room to maneuver.

6. Power Grid Constraints on AI Infrastructure

The artificial intelligence revolution may be power-constrained before it’s innovation-constrained. U.S. electrical grid limitations could cap AI capital expenditure growth, creating a bottleneck that slows the technology’s transformative potential.

7. China’s Critical Minerals Dominance

China’s control over critical minerals poses cascading risks across semiconductors, automotive, consumer electronics, aerospace, defense, robotics, medical imaging, and telecommunications. The statistics are sobering: globally, bringing a mine from planning to production takes 18 years on average. In the United States, overlapping regulatory requirements extend that timeline to 29 years. This isn’t a problem that can be solved quickly.

8. The Dedollarization Drift

Central banks are gradually shifting marginal reserves away from the dollar toward alternative currencies and non-traditional assets, including cryptocurrencies. While this transition is measured rather than abrupt, a weakening dollar carries inherent inflationary risks for the American economy.

9. Escalating China Trade Tensions

Trade restrictions that began with semiconductors could expand into cloud computing, financial services, and broader supply chain fragmentation. More punitive anti-trade measures introduce systemic inefficiencies, increase the risk of capital misallocation, and create inflationary pressures while acting as a headwind for technology sectors.

10. The AI Capital Expenditure Question

America’s largest technology firms are embarking on a massive AI infrastructure buildout. Markets have applauded this spending so far, but history offers cautionary tales. The late 1990s saw telecommunications companies pour over $500 billion into fiber optic networks, anticipating rapid internet adoption. Their projections proved wildly overoptimistic, leaving the industry to languish for years amid capacity gluts and collapsing prices.

A generation earlier, the railroad boom of the 1870s followed a similar arc. One enduring lesson from these technological revolutions: the builders of foundational infrastructure rarely capture most of the value they create. Instead, that value flows to their customers and society at large—a pattern that should give AI infrastructure investors pause.

11. Demographic Headwinds: The Labor Force Slowdown

U.S. birth rates have fallen below the population replacement rate, while net immigration—after accounting for asylum seekers, parolees, illegal entrants, and temporary protected status holders—appears to be declining to roughly half the rate observed from 2001 to 2022.

The arithmetic is inescapable: sustaining economic growth will eventually require one of three outcomes: (a) more workers through increased immigration, (b) a rising labor force participation rate, or (c) a substantial positive productivity shock.

The Bottom Line

Consumer confidence may be low, but perhaps it reflects an instinctive recognition of these gathering storm clouds rather than irrational pessimism. Growth continues for now, but the foundation supporting it shows more cracks than conventional metrics reveal. Understanding these 11 risks doesn’t require predicting which will materialize or when—it simply requires acknowledging that today’s economic strength may be more fragile than the headline numbers suggest.

The real question isn’t whether these risks exist. It’s whether we’re prepared if the risks become facts, not potential.

Larry Swedroe is the author or co-author of 18 books on investing, including his latest Enrich Your Future. He is also a consultant to RIAs as an educator on investment strategies.