President Trump made many promises last year in the campaign trajectory. Investors and business leaders enthusiastically supported some, including low taxes and relaxed regulations, and expressed vigilance about others, including tariffs and reduced immigration.
But when Trump won the election, there were few indications of that ambiguity. Stock prices have risen, similar to a measure of business optimism.
Investors at the time provided a brief explanation. They believed that Trump, backed by a Republican-controlled Congress, would prefer more destructive policies like tariffs if he was scared of financial markets, and would track down some of his reduced agenda.
It's becoming more and more clear that they were wrong.
In his first weeks of office, Trump made tariffs a central focus in economic policy, imposed on allies and enemies, and sometimes imposed sudden penalties. He threatened to curb subsidies that companies have become dependent on. And he has stepped up Elon Musk's efforts to reduce federal bureaucracy, kicking potential tens of thousands of federal workers out of work, and cutting off billions of dollars in government grants and contracts.
It's the most surprising thing, at least for Wall Street optimists. Trump has not been hampered so far by signs of economic rifts or sharp drops in stock prices.
“The idea that voluntary market constraints will suppress the administration should be discounted,” said Joe Brusseras, chief economist at accounting firm RSM.
Sure enough, on Tuesday, financial markets appeared to be settling down after days of sudden losses, so Trump struck them in another shock, escalating a trade war with Canada. Major stock indexes quickly fell sharply on the news, with the S&P 500 down almost 1% the day. Trump ultimately reversed his decision after saying Canada would remove the electricity surcharge that poses a presidential threat.
It's far from being blocked by warnings that his policies are creating economic damage, and Trump recently accepted it, informing Fox News interviewers on Sunday that economic disruption reflected a necessary “transition period” and refused to rule out a recession.
Asked about the flogging of financial markets on Tuesday, Trump told reporters:
It follows comments from White House Press Secretary Karoline Leavitt, who said the stock market response was a “momentary snapshot.”
“Look, the President is unshakable in his commitment to restoring American manufacturing and global domination, and I think he doubled it with his new statement,” she said.
Other members of his administration reflect that message, explaining the reductions in tariff-induced price increases and government spending as tough but necessary drugs to bring the economy back to health.
Treasury Secretary Scott Bescent told CNBC last week that the economy needs a “detox period” after being “famous with this government spending.”
But most economists dismiss the idea that the economy needs such shock therapy, or that Trump's policies would be useful if they did.
“It's an effort to give us the pain and uncertainty we are experiencing at this point and encourage us to reach a better place,” said former Treasury Secretary Nathan Sheets, global chief economist for Citigroup, the current administration's new message. “But the bigger question is, will we really get to a better place?”
According to Sheets and others, the answer is “no.” Tariffs can raise prices and slow growth. Tighter immigration policies can do the same. Government layoffs could drive unemployment, but reducing federal investment in research and development could reduce productivity in the US economy in the long term.
“We've seen a lot of effort into this world,” said Tarasinclair, an economist at George Washington University.
“Shocking factors” for companies
Economists differ in their opinion on how much damage the new administration's policies have caused. The economy enters the year with great momentum, and most predictors believe that if Trump doesn't escalate his trade war further, there's enough cushion to avoid the recession.
However, the uncertainty over the past six weeks has been enough to cloud what appeared to be a sunny economic outlook until recently. The survey says consumers are not optimistic about their finances and are worried about price increases. Companies are also losing confidence and are slow to make investment decisions.
“There are shocking factors in the business community we see right now,” said Thomas Simons, chief US economist at investment banking firm Jefferies. Companies are slowing down employment and postponing purchases of products and equipment, Simons said. “For now, you'll want to take a breath and calm some of the dust before making that decision.”
Beware of short-term pain
The idea that Americans must endure short-term pain for long-term benefits is nothing new to Trump. In his first term, he praises the farmers, who are collateral damages in the trade war with China, describes them as “patriots,” and sacrifices for greater profits.
But in his first term, Trump tried to offset that loss with billions of dollars in aid for farmers.
This time, the costs associated with Trump's policies are much wider potentially, coming in a rather different economic context when Americans are hurt by years of high prices and rising borrowing costs.
According to consumer surveys, Americans are beginning to predict higher prices as a result of tariffs. It could cause political and economic problems for Trump. As consumers begin to expect faster inflation, it could make it more difficult for Federal Reserve policymakers to counter the slowdown in the economy through lower interest rates.
Some Fed officials have expressed concern that a combination of slowing growth and stubborn price pressure could potentially bind central banks.
“It's a stag,” Austan D. Ghoolsby, president of the Federal Reserve Bank of Chicago, said in an interview last week. “There's no general answer to what you should do.”
Bescent and other members of the Trump administration argued that the economy they inherited was not as strong as it appeared. In a speech in Washington last month, he argued that growth is effectively supported by government spending and that the economy needs to be separated from its support.
“The excessive government spending and excessive reliance on overwhelming regulations may have provided reasonable indicators, but ultimately left an economy headed towards a fragile, unstable equilibrium,” he said.
But Jared Bernstein, who chaired the Economic Adviser Council for former President Joseph R. Biden Jr., said Becent and other members of the Trump administration were simply looking for someone to take responsibility now that economic data is beginning to deteriorate.
“They inherited and continued the strongest economy of all developed economies, and they were wasted inheritance in just six weeks with policy disruptions that protect business and consumer trust along with the market,” Bernstein said.
Government statistics support the notion that the economy is solid when Trump takes office, even if he excludes the role of government. Government spending played a key role in supporting the economy during the Covid pandemic, both at the end of Trump's first term and at the beginning of the Biden administration. But it later fell into Biden's term, but private sector employment, investment and spending remained healthy.
