US midterm elections: Unfulfilled promises. The state of the US economy and democracy

Two years after US President Donald Trump's re-election, the US midterm elections on November 3, 2026 offer the first nationwide referendum on his second term. This report assesses whether the administration has kept its economic promises and whether the elections can or will change the direction of US economic and foreign policy. This report focus on three fundamental pillars of President Trump's economic policy: a loose fiscal policy reducing tax burdens, a trade policy which includes unilateral tariffs, and the effort to revitalize domestic manufacturing and support investment in artificial intelligence (AI). An analysis of the actual economic development since President Trump took office in January 2025 shows a mixed picture of success and highlights the fragility of the current US growth model. While GDP growth remains robust and investment is increasing substantially, the labor market adds fewer jobs than under the previous US administration and inflation has been well above the US Federal Reserve's (Fed) target of two percent, which addsto the ongoing affordability crisis in the US. The US-Israeli war against Iran adds to the high government debt and increases interest rates further, forcing lenders to question the sustainability of the US government's outstanding debt of 40 trillion US dollars. While investment in AI is indeed dynamic and drives overall GDP growth, its outsized importance in the US economy contributes to fragility which might backfire through wealth concentration and financial market volatility. One of the central aims of the Trump administration has been to reduce the US goods trade deficit by introducing a wide range of US import tariffs. However, since there are dominant macroeconomic factors driving the US goods trade deficit, the tariffs have not led to a sustained reduction so far. In August 2026 the monthly total US goods trade deficit amounted to 130 billion US dollars, which is higher than in the same month two years ago. But the composition of the total goods trade deficit changed, as US tariffs vary by country or region as well as by product groups. In August 2026, the EU only accounted for 7 percent of the total US trade deficit, whereas it made up 20 percent in August 2024. This is less because of a significant reduction in US imports from the EU, but more because the US exports more goods, especially energy products, to the EU. China's share also reduced to 14 percent from 29 percent two years ago. Instead, Mexico and Vietnam now each account for 20 percent of the total US' goods trade deficit. The absolute value of the US's goods trade deficit with Germany remained relatively stable throughout the first two years of Trump's second term in office. Decreasing the US' goods trade deficit is part of a bigger project of the current US administration to bring back manufacturing to the US. In this vein, foreign direct investment (FDI) flows to the US should be increased. Analyzing total FDI flows to the US using data from the US Bureau of Economic Analysis, this strategy has not been successful so far: FDI inflow amounted to 248 billion US dollars in 2025, which is a reduction of 8.2 percent to the previous year and 18 percent when compared to the average over the period 2015-2024. Concentrating on FDI flows from the EU to the US only, there was a slight increase of 1.4 percent in 2025 compared 2024, but a decrease of 12 percent compared to the average value over the previous ten years. The trend of investment inflows from German companies to the US is unclear: While the US data indicates an increase of 40 percent in 2025, data from the German Bundesbank German records a decrease of 21 percent. Turning to worldwide manufacturing FDI flows to the US, there is a slight increase of 3.3 percent to 114 billion US dollars in 2025 compared to 2024, but in comparison to the average value for 2015-2024 this is still a decrease of around 20 percent. This negative trend also holds for EU manufacturing FDI flows to the US. The 2026 midterm elections are unlikely to reset US policy. Democrats are favored to win the House of Representatives, and the Senate is a toss-up; any new majority will be very slim and far from the two-thirds needed to override a presidential veto, meaning the US president will retain great influence over the legislative agenda. Most congressional seats are safe for one party, and polarization has significantly reduced crossparty cooperation. This makes it unlikely for an oppositional Congress to successfully pass any legislation which revokes or limits presidential tariff powers - which rest on laws Congress passed decades ago - or exert greater control over foreign policy. Moreover, formerly independent regulators are now formally under presidential control, with the Fed being the only exception. A Democratic-led House or Senate could investigate the administration and exert greater influence over budget negotiations, but it could not likely override a presidential veto to reverse tariff or foreign policy. German and European stakeholders should therefore expect current US trade policy, including tariffs, to continue at least until January 2029, together with persistent uncertainty in US economic policy. A real policy shift becomes possible only after the 2028 presidential elections, but the structural drivers of volatile US policy - and congressional weakness - will continue.