The U.S. economy is poised at the close of 2024, ending on what many experts describe as the most stable footing since the tumultuous onset of the coronavirus pandemic. Inflation has cooled significantly, unemployment rates are low, and the Federal Reserve is taking measures to lower interest rates. Yet, as the country looks forward to 2025, uncertainty looms due to one primary actor: President-elect Donald J. Trump.
During his campaign, Trump has unveiled ambitious and sweeping changes to economic policies, prompting both optimism and concern among economists and markets alike. His proposals include the implementation of steep new tariffs and the potential mass deportation of undocumented immigrants. Economists warn these changes could lead to dire consequences, including rising prices, slower economic growth, or even both.
Michael Gapen, chief U.S. economist at Morgan Stanley, reflected on the future by stating, "It is a very uncertain outlook, and most of the uncertainty from potential changes in policy." Such sentiments highlight the apprehension surrounding Trump’s economic agenda.
Last month, Trump made headlines with his announcement on social media, declaring 25% tariffs on imports from neighboring countries, Canada and Mexico, if they do not curb the influx of drugs and migrants. This hardline stance on tariffs has fueled concerns among analysts, who fear these aggressive policies could disrupt trade relations significantly.
Michael Strain from the American Enterprise Institute elaborated on this point, stating, "Markets have a serenity about trade and immigration policy... I think is unwarranted. Trade and immigration policy could be extremely disruptive to the economy." His analysis suggests the potential for severe economic fallout if these policies are enacted as planned.
Gapen and others have painted scenarios where aggressive tariffs could inhibit investment, creating barriers for employers who are already struggling to find labor due to proposed deportations. This could lead to rising costs across the board for consumers, reminiscent of the stagflation the U.S. last experienced nearly fifty years ago.
According to Strain, this worst-case scenario would prompt dramatic increases across the pricing spectrum. He warned, "If this happens, Americans could face both rising prices and slowing growth." He isn't overtly predicting this will come to pass, but he does caution financial markets might underestimate the likelihood of these developments.
Trump's economic adjustments also encompass tax cuts for individuals and businesses—measures aimed at stimulating faster growth, albeit at the risk of increasing the federal deficit. Meanwhile, regulations may be stripped back, which could boost corporate profits but potentially endanger worker safety and the environment.
Despite these proposed changes, it remains unclear precisely how much Trump will be able to implement his agenda, considering potential pushback from Congress and the courts. This uncertainty is palpable as many Americans feel conflicted. Despite the Fed's actions to stabilize the economy, frustration over runaway prices, particularly with essentials like food and housing, was prevalent among voters, contributing to Trump’s electoral support.
Still, Gapen believes the U.S. economy could see modest growth, predicting the GDP will expand by just over 2% next year, down from over 2.5% this year. Though this projection seems consistent with Wall Street analyses, Gapen himself expresses skepticism, considering the unusual economic environment. "A base-line outlook isn’t quite as useful as it is in normal times," he commented.
The rise of investor confidence post-election has been notable, with stock markets climbing. It appears many investors expect Trump to prioritize tax cuts and deregulation, potentially easing concerns over trade and immigration. His selection of Wall Street executives, like Scott Bessent, as Treasury Secretary fosters belief these figures might temper Trump's more aggressive economic strategies.
Yet, those hoping for moderation might be disheartened by Trump's recent appointments and remarks signaling steadfast commitment to his hardline policies on immigration and tariffs. The ensuing market euphoria might prove to be overly optimistic or even hazardous as economic conditions fluctuate.
Economists continue to monitor the labor market closely as the number of unemployed individuals edging toward job recovery suggests hidden vulnerabilities. Aditya Bhave of Bank of America stated, "If there’s one thing you want to be concerned about with the economy right now it’s around the labor market." It serves as yet another reminder of the delicate balance policymakers must maintain between fostering growth and controlling inflation amid turbulent times.
Despite the shadow of uncertainty looming over the economy, some experts argue there are reasons for sustained optimism. Households carry relatively low debt levels compared to their incomes, which could bolster consumer spending. Recent productivity growth, paired with advancements such as artificial intelligence, may help maintain economic vigor.
Overall, the outlook for the U.S. economy remains unclear as Trump prepares to take the reins with his ambitious policies. A recognition for both the potential benefits and pitfalls of such changes is central to the conversation as the nation embarks on this new chapter. Can the economy sustain its upward momentum or will Trump’s proposed measures lead to surprising disruptions? Time will only tell.
