US growth slowdown to 1.5% fuels populist economic revolt

A quarter-century of slowing growth and widening inequality has eroded faith in the centrist economic consensus that governed Western democracies after World War II.

US gross domestic product grew at an estimated 1.5% annualized rate in the second quarter, the latest reading in a quarter-century slowdown that has driven voters toward populist and socialist movements across Western democracies.

"Public disappointment with the economy has sustained this revolt," William A. Galston, senior fellow at the Brookings Institution, wrote in a Wall Street Journal column. "Average families believe that their interests have been ignored, and the facts back them up."

GDP grew at a compound annual rate of 3.8% from 1950 to 1974 and 3.2% over the following quarter-century, including 4% during Bill Clinton's presidency. Since January 2001, the annual growth rate has averaged 2.1%, with Q2 2026 coming in below consensus at 1.5% as imports weighed on the headline figure.

The slowdown has coincided with a structural shift in income distribution. Corporate profits doubled their share of national income from 6% to 12% since 2001, while workers' share fell 5.7 points to 51% — the lowest since the government began tracking the data in 1947. If labor's share had held at 2001 levels, the average worker would have earned an additional $8,000 in 2025.

The income gap has widened sharply across the distribution. Between 2001 and 2024, household income for the middle grew 18.6%, compared with 32.1% for the top 10% and 33.5% for the top 5%. Real weekly earnings for median workers rose from $336 to $378 in 1982-84 dollars — an annual increase of just 0.5% — while total compensation including benefits grew at 0.8% per year. Real GDP expanded 71% over the same period, yet inflation-adjusted corporate profits nearly quadrupled from $533.4 billion to $2.12 trillion in 2001 dollars.

The shift from labor to capital reflects more than tax-driven accounting changes, Galston argued. The bulk represents a structural change in the relationship between workers and capital, a trend that artificial intelligence adoption is likely to accelerate. The Federal Reserve under Chair Kevin Warsh held interest rates steady for the second consecutive meeting, with Q2 GDP missing consensus as imports surged.

The political consequences are visible across the spectrum. The Democratic Socialists of America has gained significant ground within the Democratic Party, while populist-nationalist movements have displaced traditional conservative parties in several Western democracies. The new left and new right disagree on immigration, culture and foreign policy, but both blame the economic policies of the post-war duopoly for deindustrialization, slower growth and the widening gap between highly educated urban areas and less educated small towns and rural regions.

Discontent over long, costly wars and lingering controversy from the 2008-09 financial crisis and the pandemic have compounded the revolt against the political establishment. President Trump's tariff agenda and New York Mayor Zohran Mamdani's price-control proposals represent competing responses to the same economic shortfall.

Policy Responses Risk New Distortions

Tariffs raise prices and price controls reduce supply, Galston noted, both creating costly economic distortions. Yet they offer supporters hope that incremental policy changes from both parties have failed to provide. A decade ago, Reagan-era small-government conservatism gave way to big-government populist nationalism within the Republican Party; the Democratic Party now faces a comparable challenge from the DSA.

The question for investors is whether these structural trends persist. With GDP growth averaging 2.1% since 2001 versus 3.8% in the post-war boom era, and labor's share of national income at historic lows, the political pressure for interventionist economic policy is unlikely to abate. The Fed's hold under Warsh, combined with Q2 growth below consensus, suggests the macro environment remains constrained even as AI-driven capital spending booms. If the Democratic Party fails to craft a new agenda that is bold, economically responsible and publicly acceptable, developments in New York, Michigan and Wisconsin since 2025 will prove to be harbingers of its future, Galston warned.

This article is for informational purposes only and does not constitute investment advice.

Labor's Share Falls to 51%, Lowest Since 1947

Policy Responses Risk New Distortions