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HomeLocalUnderstanding the Economic Impact of Trump's Triumph on the U.S. Economy

Understanding the Economic Impact of Trump’s Triumph on the U.S. Economy

 

 

How Trump’s Victory May Impact the US Economy


The plans of President-elect Donald Trump, which include raising tariffs, reducing taxes, and restricting immigration, could lead to a rise in inflation. However, experts are split on whether this will ultimately harm or help the U.S. economy in the short term.

 

Many economists suggest that the increase in tariffs and immigration restrictions might outweigh the advantages of reduced taxes on spending, resulting in slower growth, but not causing a recession.

According to Samuel Tombs, chief U.S. economist at Pantheon Macroeconomics, “We predict that 2025 will see slower GDP growth rather than a downturn.”

Trump, a Republican and former president, won the election on Wednesday, defeating Democratic Vice President Kamala Harris. The Republicans also gained control of the Senate, while the House of Representatives remains undecided as of Wednesday afternoon.

 

Here’s an overview of the potential economic impacts:

Tariffs

Trump has proposed imposing tariffs of 10% to 20% on all imports and up to 60% on products from China.

 

During his first term, Trump’s tariffs affected about 10% of U.S. imports, including primarily steel, washing machines, and solar panels. His new suggestions are broader and would impact more consumer products, as noted by Nomura in a research report released Wednesday.

 

Typically, American retailers and manufacturers have passed along some of these increased costs to consumers by raising prices, while absorbing some in their profits.

 

Consequently, Nomura has increased its inflation projections to 3.1% for 2025 and 2.7% for 2026, up from previous estimates of 2.3% and 2.1%. The inflation measure favored by the Fed was at 2.7% in September, down from nearly 6% in 2022.

 

According to estimates from the National Retail Federation, the new tariffs would decrease Americans’ purchasing power by $78 billion, leading households to cut back on spending, thereby negatively impacting economic growth. The Peterson Institute for International Economics also estimates that these tariffs could cost each U.S. household approximately $2,600 annually.

Tariffs may provoke retaliatory measures from other countries, which would hurt American exports and further hinder the economy, as highlighted in a report by Oxford Economics.

Nevertheless, Ryan Sweet, chief U.S. economist at Oxford, predicts Trump may limit his trade strategies and focus tariffs more narrowly on China, Mexico, Canada, and the EU. He also believes that these tariffs will be phased in gradually, causing a smaller inflation increase of three-tenths of a percentage point by 2027.

Taxes

Trump and a Republican-led Congress are likely to extend the Tax Cut and Jobs Act of 2017, benefiting both individuals and businesses. Individuals can expect lower tax rates, an increased standard deduction, and a larger child tax credit, according to Sweet.

 

Businesses would continue to benefit from accelerated deductions for capital investments and research and development costs, Sweet notes. However, Nomura is doubtful that Republicans will back Trump’s other proposals, such as cutting the corporate tax rate further or exempting tips and Social Security from taxation.

 

Trump is also expected to cut funding for social services, with stricter requirements for eligibility for Medicaid and food stamp programs, as pointed out by Sweet.

Immigration

Trump intends to revive policies that require asylum seekers to wait in Mexico during the resolution of their cases and to deport millions of undocumented immigrants. His approach would go further than the recent measures by outgoing President Joe Biden, which strengthened enforcement in June.

Sweet forecasts net migration to the U.S. could decline to around 800,000 annually from 1.1 million. Immigration has driven the growth in the labor force that has helped alleviate pandemic-related labor shortages and wage inflation, which in turn has contributed to lowering inflation. A significant reduction in immigration could once again increase inflation and hinder economic progress by limiting job growth and spending from foreign tourists, as noted by Sweet and Nomura.

 

Current Economic Outlook

So, what is the overall assessment for the U.S. economy?

Nomura suggests that any positive impact from lower taxes on consumer spending will be restricted, partly because most tax cuts will likely benefit higher-income households, who tend to save rather than spend their extra money. Overall, the negative effects from increased tariffs and limited immigration are likely to outweigh these gains.

The anticipated increase in inflation means that the Federal Reserve is projected to reduce rates only by a quarter point next year, as opposed to the full percentage point decline that Fed officials had predicted in September.

Thus, both Nomura and Pantheon predict a slower growth rate for the economy next year.

 

However, Sweet believes that the economic enhancement from lower taxes could boost growth by three-tenths of a percentage point in 2026, even as tougher trade and immigration policies might later reduce growth by six-tenths of a percentage point by 2028.

He anticipates that the Federal Reserve will persist in significantly reducing rates until increased tariffs lead to a rise in inflation by 2026.

 

Mark Zandi, the chief economist at Moody’s Analytics, commented, “Though President Trump’s policies may hinder the economy, they are unlikely to destroy it entirely. The President is expected to adjust his approach if it seems his policies are causing considerable economic harm.”