US economy loses steam under Trump

The strength of the U.S. economy has been the envy of the world in recent years. The predictions of a recession during Joe Biden’s term in office never came true. The labor market broke job creation records, while Federal Reserve Chairman Jerome Powell maneuvered to achieve the long-awaited soft landing: controlling inflation without triggering a crisis.

On his return to the White House, President Donald Trump has inherited a thriving economy. However, some dark clouds are beginning to appear on the horizon. The deterioration of some consumption — exacerbated by foreign trade indicators — has even led the Federal Reserve Bank of Atlanta to predict a contraction of activity in the first quarter of 2025. Most economists are betting on growth… but they’re also entertaining the possibility of a slowdown.

Handfuls of data have put economists and investors on guard in recent weeks. No piece of information is conclusive on its own, but together, they support the idea that the U.S. economy is losing some steam as a result of tariff uncertainty, persistent inflation, the layoff of government workers and the halting of some federal spending.

“The U.S. economy maintained solid momentum at the beginning of the year, but growing uncertainty around trade, fiscal and regulatory policy is clouding the outlook,” says Gregory Daco, chief economist at EY-Parthenon. He highlights the more protectionist stance of the Trump administration: “Beyond the inflationary boost and negative impacts on growth [caused by] higher tariffs, greater political uncertainty could lead to volatility in financial markets, as well as businesses and consumers increasingly adopting a ‘wait-and-see’ attitude.”

Trump’s trade policy is confusing and contradictory, full of unfulfilled announcements, changes of criteria, inconsistent threats and improvisation. Even though new tariffs have barely been applied, they do seem to have begun to have consequences. The trade deficit has shattered records, as the announcements seem to have had a pull effect on imports. Certain American firms are speeding up shipments, in an attempt to avoid taxes down the road.

Moreover, tariffs also help explain the shift in inflation forecasts, which the Federal Reserve is closely monitoring to prevent steep price increases from becoming entrenched in the economy. Expectations have soared, according to survey-based measurements from the University of Michigan, the Conference Board and the New York Federal Reserve. If they remain high, it would be a serious obstacle to the Fed’s goal of bringing inflation back to 2% without causing a significant economic slowdown in the process.

Bank of America economists, however, believe that there are reasons to not lose sleep over the data. First, there seems to be a huge partisan divide contaminating the results: Democrats believe inflation will soar under Trump to 5.4% in a year, while Republicans expect deflation (0.1%), according to the University of Michigan survey. “The takeaway from the University of Michigan data is that politics has [influenced] consumer surveys on inflation expectations,” says Stephen Juneau, an economist at BofA Securities.

On the other hand, forecasts based on market quotes or on surveys of economists and businesses don’t show the same divide. If anything, Juneau expects tariffs to increase inflation, even if only temporarily. And he also thinks expectations can become entrenched. They’re heavily determined by the items that households buy most frequently, such as eggs, milk, or gasoline. Rising food prices — particularly the price of eggs, which has been driven up due to bird flu — may cause those high inflation expectations to spread.

The flip side of price increases is a deterioration in consumer confidence, which has also been seen in recent surveys. February saw the largest monthly decline since August of 2021. “There was a sharp increase in mentions of trade and tariffs, returning to a level not seen since 2019. In particular, comments about the current administration and its policies dominated the responses,” explains Stephanie Guichard, a senior economist for global indicators at The Conference Board.

The worsening consumer sentiment may also have been influenced by the freeze on federal spending and the layoffs of civil servants promoted by Elon Musk and the newly-created Department of Government Efficiency (DOGE). The cuts can weigh on the gross domestic product (GDP). On Sunday, March 2, Secretary of Commerce Howard Lutnick flirted with the idea of excluding public spending from the calculation of GDP, or possibly showing two measurements — with it and without it — in line with what Musk himself has called for.

The deterioration in confidence is threatening to reduce consumer spending, the main engine of the U.S. economy. Figures released on February 28 by the Bureau of Economic Analysis, part of the Commerce Department, show that personal income rose 0.9% in January, while personal spending fell 0.2% (0.5% in real terms), the biggest decline in four years.

Consumers reduced spending in a month of frigid temperatures after a strong holiday season. Caution must be applied when extrapolating the data from one month, but according to Gregory Daco of EY, “the resulting 1.1 percentage point increase in the personal savings rate is noteworthy, as it could indicate the start of precautionary saving by households.”

“It’s too early to conclude whether that’s the case… but it’s certainly something to keep in mind as tariff threats, federal government layoffs and fiscal uncertainty loom,” he argues.

Real estate market data, leading indicators of business activity, and some labor market figures also point in the direction that economic activity is slowing somewhat, although it’s far too early to draw conclusions. The stock market and cryptocurrencies have lost almost all gains they accumulated since Trump’s victory in the 2024 presidential elections.

The price of U.S. Treasury bonds has been reflecting the shift in investor concerns. Initially, the dominant theory was that tariffs and supply restrictions in the labor market (due to immigration restrictions) would fuel inflation and force the Federal Reserve to keep rates high for longer. The central bank lowered official rates by one point between September and December, but yields on 10- and 30-year bonds soared. In recent weeks, however, long-term rates have fallen in the face of weaker growth prospects. In fact, the yield curve has even inverted (higher yields at shorter terms), which is a classic indicator of recession risk.

The lack of clarity regarding tariffs is taking its toll. “The longer it goes on, the greater the uncertainty,” laments Alex Cohen, a currency strategist at Bank of America.

Even before Trump confirmed the start of the trade war with Mexico and Canada on Tuesday, Cohen argued that the market “seems to be accepting the idea that, while tariffs pose initial risks of inflation and a rise in the U.S. dollar, at the same time, the impacts on growth shouldn’t be overlooked. Indeed, supply chain disruptions, the effects of possible retaliatory tariffs [from other countries], the paralysis of investments in capital goods and the adverse effects that the strength of the [U.S.] currency can have on exporters and on the profits of multinational companies are factors that could lead to lower [growth] rates and a weaker dollar.”

Gregory Daco expects a slowdown in economic growth in the coming quarters as a result of all these risks, inching down to a quarterly pace of around 2%. He expects consumer spending to advance at a more moderate pace as households continue to adapt to a higher cost of living and high interest rates. In his view, slower growth will lead companies to continue to manage their workforces strategically, prioritizing productivity improvements to alleviate ongoing cost pressures.

“We expect the economy to expand by 2.3% in 2025, with GDP growth momentum tapering off in the second half of the year [...] We anticipate an average growth rate of 1.7% in 2026,” he concludes. This would be below the 2.8% recorded in 2024, but still above-average growth for an advanced economy. Inertia remains very high.

Inflation or growth

In any case, Powell’s job is complicated. In his latest statements, the chair of the Federal Reserve has indicated that — after the one-point reduction in the price of money — monetary policy is well-placed to respond to a weakening of the labor market or a rise in prices. But responding to both at the same time is more difficult. “Trump’s policies put the Fed in a difficult situation,” opines Tiffany Wilding, an economist at Pimco, an American investment management firm.

“[Stubborn] inflation raises questions about the extent to which the Fed will ultimately carry out the two 25 basis point rate cuts implied in its December projections. At the same time, a more significant slowdown in real GDP growth and labor markets — which have so far been supported by strong immigration trends — could increase the perception of greater downward risks for the economy,” Wilding explains.

Jeff Schmid, president of the Federal Reserve Bank of Kansas City, spoke specifically about that dilemma last week, while giving a speech in Washington, D.C. “There are risks that could make our monetary policy decisions increasingly difficult,” Schmid said. “While the risks to inflation appear to be to the upside, [recent data] suggest that elevated uncertainty might weigh on growth. This presents the possibility that the Fed could have to balance inflation risks against growth concerns,” he noted, before recalling the lessons of the 1970s and 1980s, when price increases became entrenched in the economy after the central bank wasn’t strict enough.

Schmid is clear: given the choices at hand, the first priority will be to control prices. “With inflation just recently at a 40-year high, now is not the time to let down our guard. It could be argued that some of the factors driving up inflation expectations are likely one-off transitory developments, but again, given recent experience, I am not willing to take any chances when it comes to maintaining the Fed’s credibility on inflation,” he affirmed.

Dozens of large U.S. companies have warned of the inflationary risks posed by Trump’s tariffs. They’ve also pointed out the possible impact of these protectionist measures on economic growth, as well as possible distortions in supply chains. Walmart — the company with the highest turnover in the world, which serves as a barometer of American consumption — downplayed the tariffs, but has presented lower growth forecasts than the market expected, partly due to uncertainty about the economy.

Last week, at an event in Chicago, Walmart CEO Doug McMillon said that the conglomerate is detecting “stress behaviors” among consumers, who are worried about making ends meet. “You can see that the money runs out before the month is gone, you can see that people are buying smaller pack sizes at the end of the month.”

With its low-price policy, Walmart has emerged as one of the victors of the inflationary environment of recent years. Although its growth forecast is lower than the market expected, it remains positive. In fact, it expects the landscape to clear up, as in previous adverse scenarios. Presenting the company’s accounts to analysts, McMillon said: “We’ve seen clouds on the horizon [in the past] and they never came. And, right now, I feel a bit like that.”

Sign up for our weekly newsletter to get more English-language news coverage from EL PAÍS USA Edition