In a shake-up that's got everyone talking, President Trump's ambitious plan is casting a cloud of uncertainty over an otherwise robust economy.
As President Donald Trump returns to the White House, boasting about reshaping the economy through executive actions and legislation, the United States is currently enjoying a robust economy. The unemployment rate ended 2024 at a mere 4.1%, a figure lower than even President George W. Bush and President Richard Nixon faced when they took office.
Despite the cost of living remaining a major frustration, the jobs market is experiencing an uninterrupted growth spree, wage increases are surpassing price increases, and overall growth is exceeding expectations. JPMorgan Asset Management's Chief Global Strategist David Kelly confirms, "The president is inheriting a very healthy economy."
However, a significant cloud looms on the horizon: uncertainty. The shift in power often brings in new ideas and philosophies, which can be a source of economic uncertainty. Nevertheless, Trump is beginning his second term with a flurry of executive actions, covering topics from energy and immigration to government functioning. He promises that this is just the beginning, pledging to impose substantial tariffs, slash excessive red tape, and introduce new tax breaks for individuals and businesses.
According to JPMorgan's Kelly, "Uncertainty is a tax on the economy." The adage that "it's better to keep your opponent in the dark" certainly applies to sports, but not for economies. If plans aren't made clear, people may delay their decisions, slowing down the economy.
Trump's trade agenda raises several questions, as the exact timing and impact of proposed tariffs remain unclear. Despite promising massive tariffs on allies and rivals, the specifics are yet to be ironed out. For example, on February 1, Trump announced 25% tariffs on Canada and Mexico, but no executive action followed his declaration. On other nations, the Trump administration may consider across-the-board tariffs, but no definitive plans have emerged yet.
Trump knows that cost of living is a significant pain point for many Americans, who are spending more than in January 2021 for the same goods and services. An average increase of $1,213 per household may not seem significant at first glance, but considering that paychecks only increased by a little more, people are essentially getting by. The typical household is struggling to keep up with the mounting costs.
Economists are skeptical about Trump's ability to reduce prices: "You can't get prices back to pre-pandemic levels. The only way to do that is to get not a recession, but a depression," says Kelly. Inflation is the economy's natural way of adjusting prices to the changing conditions, and slashing them could have unintended consequences. The Federal Reserve defines "inflation" as a rise in the general level of prices, and while deflation is officially the opposite, it's not as beneficial as it might seem.
Deflation can lead to a decline of aggregate demand, which may trigger an economic depression. It is not uncommon for consumers to delay their purchases with the hope of prices dropping further. As a result, demand decreases, purchase volume slows, and business activity slumps—which ultimately affects the economy directly.
Trump's economic agenda may be fraught with challenges. The proposed tariffs could create significant trade disruptions, lead to inflationary pressures, heighten geopolitical tensions, and cause economic disruptions. There are also concerns that the US economy is already overheating. The exact implementation timeline, legal authorities, and political feasibility of the proposed tariffs are all uncertain, further amplifying the challenges.
Meanwhile, trade partners are preparing their responses. Canada and Mexico have threatened retaliation, while Europe has expressed its readiness to protect its interests. China, an established target for the Trump administration's trade policies, may retaliate with its own tariffs.
Tariffs on essential materials like steel, concrete, and lumber could drive up project costs, causing delays in infrastructure and construction projects. Importantly, tariffs are paid by US importers, who may pass the costs on to consumers in the form of higher prices.
Many economists express concern that elements of Trump's agenda could evoke inflationary pressures. Businesses might pass the costs of tariffs on to consumers, and potential mass deportations could leave key industries short on labor—which could lead to higher prices. As it is, the US economy may already be too hot, with the inflation rate breaching the Federal Reserve's target.
In sum, President Trump's economic plans face numerous challenges. While the proposed tariffs could address specific concerns, their execution raises a variety of uncertainties. The impact of these uncertainties on the US economy and its trading partners will ultimately reveal whether Trump's vision for an economically vibrant United States can be realized.
The implementation of substantial tariffs and tax breaks by President Trump is expected to significantly impact businesses, potentially leading to higher costs for consumers.
Despite the uncertainty surrounding Trump's trade agenda, many businesses are looking forward to potential tax breaks, which could boost their profits.
