The State of the Economy Trump Inherited
When President Trump took office, the U.S. economy was in a robust state by most conventional measures. Wages were rising steadily, consumer spending was strong, and corporate profits were growing. The unemployment rate was low, and although the inflation rate was slightly higher than normal, it was on a downward trajectory. This strong foundation suggested that the economy was poised for continued growth and stability. However, only weeks into Trump’s term, the economic outlook began to darken. The once-optimistic atmosphere gave way to heightened uncertainty, casting doubt on the sustainability of the positive trends that had been in place.
The Sudden Deterioration in Economic Outlook
The shift in economic sentiment was dramatic and rapid. Measures of both business and consumer confidence began to decline sharply, reflecting growing concerns about the direction of the economy under the new administration. The stock market, which had been on a steady upward trajectory, became increasingly volatile, with sharp swings that unnerved investors. Layoffs began to increase, according to some data, and forecasters started to revise their economic growth projections downward for the year. Some analysts even suggested the possibility of the U.S. GDP shrinking in the first quarter, raising concerns about a potential slowdown or even a recession.
While most economists considered the likelihood of a full-blown recession to be low, there was a growing consensus that economic growth would slow significantly. The sudden deterioration in the outlook was striking, particularly because it was largely driven by the policies and actions of the new administration. The introduction of tariffs, coupled with the threat of retaliation from trading partners, posed a direct threat to economic growth by increasing prices and disrupting supply chains. Additionally, federal job cuts and deportations targeted industries that relied heavily on immigrant labor, such as construction and hospitality. These policies created uncertainty and instability, leaving businesses and consumers alike on edge.
A Strong Foundation, But Chaos in Policy
The U.S. economy has historically demonstrated remarkable resilience, and there were elements of Trump’s agenda that held the potential to foster growth. Business groups, for instance, were enthusiastic about Republican plans to cut taxes and reduce regulation, which could have streamlined operations and boosted productivity. However, the administration’s approach to economic policy was marked more by chaos than by careful planning. Constant shifts in policy, such as tariffs being announced and then delayed, and federal workers being fired and then rehired, created an environment of unpredictability that undermined confidence in the economy.
Michael R. Strain, an economist at the American Enterprise Institute, highlighted the damaging impact of Trump’s policies, particularly on trade, immigration, and federal job cuts. “What President Trump has proposed will not cause a recession,” he said, “but it will slow economic growth. It will take money out of people’s pockets. It will increase the unemployment rate. It will cost people jobs. It will make American businesses less competitive.” While not catastrophic in the short term, these policies were expected to fundamentally weaken the economy’s long-term prospects.
The Risk of "Death by a Thousand Paper Cuts"
While a full-blown recession was considered unlikely by most economists, there was a growing concern that the cumulative impact of Trump’s policies could still have a profound and damaging effect on the economy. Tariffs alone could shave off a full percentage point from GDP growth for the year, some economic models suggested. This would reduce the expected 2% growth rate by half, a significant contraction that would be felt across the economy. The administration’s push to deport millions of immigrants could have an even more harmful impact, given the U.S. economy’s reliance on immigrant labor in key industries such as construction and healthcare.
The effort to shrink the federal workforce, led by figures like Elon Musk, further compounded the risks. Hundreds of thousands of federal workers and contractors faced the prospect of losing their jobs, which could set off a chain reaction. Workers who lost their jobs, or feared losing them, would likely pull back on spending, forcing businesses to cut costs and leading to more layoffs. While the Federal Reserve might have stepped in to cut interest rates and shore up the economy, the simultaneous pressure from tariffs, which were pushing up prices, made such a move more challenging. “It’s a death by a thousand paper cuts,” said Jay Bryson, chief economist for Wells Fargo. “All these things individually aren’t enough to cause a recession, but if you layer them on top of one another, it might be.”
Long-Term Costs of Trump’s Policies
Even if the economy managed to avoid a recession, the long-term costs of Trump’s policies were likely to be significant. Lower immigration would reduce the labor force, a particularly concerning trend given the aging native-born population. Trade barriers would act as a chronic drag on growth, rather than causing an acute crisis. “It’s less like the economy is in a car wreck, and it’s more like the economy has decided to start smoking a pack a day,” said Michael Madowitz, an economist at the Roosevelt Institute. While the immediate impact might not be dramatic, the cumulative effect over time would be damaging.
In certain communities, the consequences were likely to be far more acute. Veterans, who made up a disproportionate share of federal workers, would be particularly hard hit by government layoffs. Similarly, regions that relied heavily on federal jobs would feel the pain of the cuts. Already, there were signs of weakness in the Washington metropolitan area, where home prices were beginning to fall. “It’s going to be substantial for certain communities,” said Gbenga Ajilore, chief economist for the Center on Budget and Policy Priorities. “When you look at the aggregate, you miss a lot of underlying detail.”
The Need for Clarity in Policy
The prolonged uncertainty surrounding Trump’s policies was likely to have its own costs, as businesses and consumers delayed investment and spending decisions. Without clarity, the economy could come to a standstill, with business confidence muted and employment and capital spending on hold. “If we don’t get clarity by the back half of this year, economic uncertainty can be like a deer in the headlights,” said Nancy Lazar, chief global economist at Piper Sandler. “Things just stop.”
For now, the economic outlook remained uncertain, with potential risks from both inside and outside the administration. While the economy had shown remarkable resilience in recent years, the combination of erratic policy decisions and the resulting uncertainty raised serious questions about its continued health. Whether the economy would emerge unscathed or be fundamentally weakened by Trump’s policies remained to be seen, but one thing was clear: the stakes were high, and the choices made in these early weeks of the administration would have far-reaching consequences.