5 economic forces that could shape the first year of Trump’s presidency

WASHINGTON (AP) — Like most presidents, Donald Trump faces an economy that rarely bends to political ambitions.

The Republican promised strong growth, high tariffs, income tax cuts and booming oil fields. But despite a strong job market and a low unemployment rate of 4.1%, it faces headwinds such as inflation, a budget deficit, increased trade tensions, the fallout from its cut plans immigration and a persistent wealth gap.

Each of these questions could help shape how voters feel about a president they sent back to the White House with the specific goal of fixing the economy.

For his part, Trump wants to blame all the challenges that come his way on his predecessor, Joe Biden, who in turn blamed Trump in 2021 for the problems that his own administration had to resolve.

“It starts with confronting the economic chaos caused by the failed policies of the last administration,” Trump said. World Economic Forum THURSDAY.

Here are five economic forces that could shape the first year of Trump’s presidency:

For voters, the price is still not suitable

Beating inflation is easier said than done.

In AP VoteCast, a comprehensive survey of last year’s electorate, 4 in 10 voters called inflation the “most important factor” in their choice of president. About two-thirds of that group voted for Trump — a sign that he owed his victory in large part to the high cost of groceries, gasoline, housing, automobiles and other goods.

Going forward, monthly Consumer Price Index reports will provide a clear measure of whether Trump can deliver on his promises. But inflation has actually increased in recent months. Consumer prices rose at an annual rate of 2.4% in September, compared to 2.9% in December. Economists say inflation could worsen if Trump imposes tariffs and resorts to deficit-financed income tax cuts.

Republicans often hit Biden hard on egg prices. But Democrats could resort to similar attacks on Trump. Over the past year, coffee prices have only increased 1% for U.S. consumers, but the International Monetary Fund The price of real beans is rising 55%, a sign that lattes, espressos and old cups of coffee could soon cost more.

Then there is housing. Voters are still frustrated by high mortgage rates and prices that remain high due to a shortage of properties. Housing represents 37% of the consumer price index. Housing price increases have eased, but housing costs are still rising at a rate of 4.6% per year, compared to annual increases. on average 3.3% before the pandemic.

Trump is betting that increased energy production could reduce inflation rates, but domestic production is already near record levels, according to the government.

What prices are actually happening

Trump announces 25% tariffs Mexican and Canadian imports from February 1st. He also mentioned additional customs duties of 10% on Chinese products. Its stated goal is to end illegal border crossings and the flow of chemicals used to make drugs such as fentanyl.

For Trump, tariffs are a diplomatic tool to achieve his political goals. But they also pose a threat that could revive trade negotiations. They also generate revenue that he estimates could bring billions of dollars to the Treasury.

Trump effectively raised tariffs during his first term, with revenue more than doubling to an annual rate of $85.4 billion, which may sound like a lot but amounts to just 0.4% of domestic product raw. Multiple analyzes by the Budget Lab at Yale and the Peterson Institute for International Economicsamong others, argue that threats of tariffs would increase costs for a typical family in a way that would have the effect of raising taxes.

What really matters is that Trump follows through on his threats. That’s why Ben Harris, a former Biden adviser and now director of economic studies at the Brookings Institution, says voters should focus on average tariff rates.

“Business is really tricky,” Harris said. “But generally speaking, look at what he does, not what he says.”

What is happening with the national debt

Trump likes to blame inflation on the national debt, saying Biden’s policies flooded the U.S. economy with more money than it could absorb. But about 22% of the $36 trillion in total debt comes from policies of Trump’s first term, according to the Committee for a Responsible Federal Budget, a budget watchdog.

Paul Winfree, a former Trump staffer and now president and CEO of the Economic Policy Innovation Center, warned in a recent analysis that the United States is getting too close to its fiscal limits for comfort. His analysis suggests that if Trump can preserve 3% growth, he could extend his tax cuts that expire in 2017 while keeping the debt sufficiently stable by cutting spending by $100 billion to $140 billion a year.

The risk is that higher borrowing costs and debt will limit Trump’s actions while keeping borrowing costs high for consumers. Lawmakers who once viewed the debt as a problem years from now increasingly see it as a problem to be solved now.

“One of the biggest mood shifts I’m noticing right now among policymakers is that they’re starting to realize the long term is today,” Winfree said.

Winfree said the key number to watch is the interest rates charged on U.S. debt — which will tell the public whether investors think the amount of borrowing is problematic. Interest on 10-year U.S. Treasuries stands at about 4.6%, up a full percentage point since September.

Immigrants are still needed to fill jobs

Trump’s executive orders constitute a clear crackdown on immigration – which could dampen economic growth and lead to a slowdown in monthly job gains. Trump often frames immigration as a criminal and national security issue by focusing on people who cross the border illegally.

But economies that fail to recruit enough workers risk stagnation — and the U.S. labor market, at this point, needs immigrants in the job mix. About 84% of the net growth in the U.S. population last year came from immigrants, according to the Census Bureau. This represents 2.8 million immigrants.

“Not only are they working in the economy, they are spending in it,” said Satyam Panday, chief U.S. economist at S&P Global Ratings. “Their spending is someone else’s income in the economy.”

If Trump were to simply return immigration to its average of 750,000 immigrants per year in 2017 and 2019, growth could slow from about 2.7% last year to 2% in the future, according to analysis from Panday. The construction, agriculture, leisure and hospitality sectors would likely struggle to find employees.

In other words, it is worth monitoring the monthly report on employment and immigration flows.

Beware of the wealth gap

Trump will have to balance the interests of billionaires and those of his blue-collar voters. Its inaugural events included several of the world’s richest men: Tesla’s Elon Musk, Amazon’s Jeff Bezos, Meta’s Mark Zuckerberg and LVMH’s Bernard Arnault. Each is worth about $200 billion or more, according to Bloomberg Billionaire’s Index.

Scott Ellis, a member of the Patriotic Millionaires group, said it’s worth watching how much their wealth grows under Trump. This year as of Friday, Arnault’s net worth increased by $23 billion, Bezos’s by $15 billion, Zuckerberg’s by $18 billion, and Elon Musk’s by $6 billion. These are all monthly increases.

In contrast, the most recent available data from the Census Bureau shows that median U.S. household wealth increased by $9,600 in 2021-22, to $176,500.