Conditions for doing business with the U.S. have permanently changed

A good starting point to get a grip on the situation is the American consumer. After all, consumer spending makes up 70 percent of all economic activity in the US, compared to around 55 percent in Europe. But then we run straight into the first complicating factor, explains Knightley, because the United States today is an economy of contrasts. "The typical American consumer doesn't exist. The top 20 percent of households account for more spending than the entire bottom 60 percent combined. The upper tier is doing extraordinarily well: high incomes and job security, locked-in low mortgage rates, soaring wealth due to record asset values. To them, inflation is more of an irritation rather than a constraint on spending."

Lower-income households, by contrast, are feeling real strain. "They spend a larger proportion of their incomes on goods that are or may become subject to tariffs. So they're more concerned about rising prices, squeezing their spending power. They're also more concerned about their jobs and they sense that their incomes are vulnerable. And thirdly, the bottom 60% hold only 15% of total wealth. They haven't benefited from the 50% rise in home prices or the 50% increase in equity markets." This two-speed economy is not just an economic problem but a social and political one that is fueling uncertainty across markets and households alike.

Despite aggressive trade protectionism, inflation has remained relatively contained. Knightley cites several reasons. While the announced tariff rate averages around 18%, customs revenue data indicates that the realized tariff rate is closer to 10%. "That's only natural. It takes time to build the customs infrastructure needed to enforce tariffs. Over time, compliance will improve and we'll likely see more price pressure." Secondly, Knightley points to a substitution effect: companies switching from suppliers in high-tariff countries like China to lower-tariff countries. Companies also absorb a large part of the tariffs. They feel they lack the pricing power to pass these costs onto consumers. To me that is indicative of the weakness we see in the consumer environment."

The slower transmission of tariffs has allowed other forces to hold prices down. “Lower energy prices, weaker housing costs, and slower wage growth are all mitigating factors,” says Knightley. These disinflationary trends have given the Federal Reserve room to focus on its employment mandate, cutting rates to support growth. Falling government bond yields and a weaker dollar have further loosened financial conditions. From this, Knightley can see an optimistic scenario unfolding. “Those three factors—lower rates, easier credit, and a weaker currency—should support growth,” he says. "Stability or clarity on international trade could tempt companies that have held themselves back to start spending again. And when that money is put to work, the economy rebounds."

A more downbeat scenario could develop in the labour market. Knightley describes it as 'low hire, low fire'. "We have seen a clear cooling in hiring, and perceptions about the jobs market have deteriorated as well. Companies aren't yet cutting staff, but they're not picking people up either. What we're really watching out for is if that shifts to 'no hire, let's fire'. Because if the jobs market turns negatively, then we have a real problem." Rising unemployment could trigger higher credit card and car-loan delinquencies, eroding trust in the banking system. More layoffs would also be a real warning signal that corporate America is becoming much more pessimistic on where we're heading. "So a weakening jobs market wouldn't just hurt workers, but have knock-on effects more broadly."

Adding to the uncertainty is the AI boom, which Knightley sees as both threat and opportunity. In one camp are the doomsayers warning how AI is going to destroy jobs, create massive inequality and concentrate power in a handful of elites. The other camp sees it as a productivity revolution that will generate massive growth and create new industries and opportunities. "Probably all of that will happen," expects Knightley, "and there will be winners and losers. The general view is that there is no alternative to letting that disruption happen and then deal with the consequences. A key question for the US economy in longer term therefore is to what extent the government will act as a stabilizing force for people who are negatively impacted."

Given all these 'either-this or-the-opposite' situations, what side would Knightley himself come down on? "I'm a natural optimist. Ultimately, I arrive at the point that you bet against the US economy at your own peril. It has an amazing ability to deal with setbacks, shocks and headwinds and just keep powering on and bounce back quickly. Because it is just such a vast, strong, diversified economy that there's always opportunities out there. The desire to take advantage of those is essential to the American psyche and its entrepreneurial culture."

It's not just the American psyche that drives the US economy forward, cool-headed geopolitical calculations contribute too. Competition with China lies at the heart of America’s economic policy. The race for technological and industrial preeminence has become a growth driver in itself. “The need to stay ahead of China is a huge motivating factor,” Knightley emphasizes. “The U.S. can’t afford to tread water, it has to keep moving forward.”

Washington’s new industrial policy—ranging from chip controls to reshoring incentives—reflects a clear shift. As Knightley says: “If you want to do business with America, you’ve got to do more of it in America.” Both major parties now back this domestically focused approach. Foreign companies can still succeed in the U.S., but the expectation is reciprocity: American jobs and investment in exchange for market access. “It’s a very transactional philosophy,” Knightley notes, “and it’s not going away.” For international CEOs, this is the new baseline for U.S. engagement.

For European executives, Knightley’s message is clear: the U.S. has become more U.S.-centric, and that is unlikely to reverse. "Whatever the outcome of the next elections, that will not change in any meaningful way," he says. "Yes, the style may become less abrasive or confrontational, but it’s a permanent change in sentiment.” European companies must adapt by investing locally, forming joint ventures, or expanding U.S.-based production to maintain access. “Simply exporting from abroad will no longer satisfy Washington’s demand for domestic benefit. In short, partnership, not distance, is now the prerequisite for doing business in America."