President Trump inherited an economy that was, by most conventional measures, firing on all cylinders. Wages, consumer spending and corporate profits were rising. Unemployment was low. The inflation rate, though higher than normal, was falling.
Just weeks into Mr. Trump’s term, the outlook is gloomier. Measures of business and consumer confidence have plunged. The stock market has been on a roller-coaster ride. Layoffs are picking up, according to some data. And forecasters are cutting their estimates for economic growth this year, with some even predicting that the U.S. gross domestic product could shrink in the first quarter.
Some commentators have gone further, arguing that the economy could be headed for a recession, a sharp rebound in inflation or even the dreaded combination of the two, “stagflation.” Most economists consider that unlikely, saying growth is more likely to slow than to give way to a decline.
Still, the sudden deterioration in the outlook is striking, especially because it is almost entirely a result of Mr. Trump’s policies and the resulting uncertainty. Tariffs, and the inevitable retaliation from trading partners, will increase prices and slow down growth. Federal job cuts will push up unemployment, and could lead government employees and contractors to pull back on spending while they wait to learn their fate. Deportations could drive up costs for industries like construction and hospitality that depend on immigrant labor.
“If the economy was starting out in quite good shape, it’s probably in less good shape after what we’ve seen the last few weeks,” said Donald Rissmiller, chief economist at Strategas, a research firm.
A Strong Foundation
The U.S. economy has repeatedly shown its resilience in recent years, and there are parts of Mr. Trump’s agenda that could foster growth. Business groups have responded enthusiastically to Republican plans to cut taxes and reduce regulation. A streamlined government could, in theory, make the overall economy more productive.
So far, however, the Trump administration’s approach to economic policy has been characterized more by chaos — tariffs that are announced and then delayed, government workers who are fired and rehired — than by careful planning.
Michael R. Strain, an economist at the conservative American Enterprise Institute, said Mr. Trump’s policies on trade and immigration, and his slash-and-burn approach to federal job cuts, would have a damaging effect.
“What President Trump has proposed will not cause a recession,” he continued. “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.”
‘Death by a Thousand Paper Cuts’
It is certainly possible for Mr. Trump’s policies to come together in a way that causes a recession. His tariffs alone could shave a full percentage point off growth in gross domestic product this year, according to some economic models — enough to cut in half the 2 percent growth rate that economists expected going into this year.
Many economists contend that deporting millions of immigrants — as Mr. Trump promised to do on the campaign trail last year — could be even more harmful than tariffs, given the U.S. economy’s need for workers, particularly in industries like construction and health care.
And the administration’s push to shrink the federal government, an effort led by Elon Musk, could leave hundreds of thousands of federal workers and government contractors looking for jobs when hiring has slowed. That could set off a chain reaction: Workers who lose jobs, or worry they might, would pull back on spending, which would force businesses to cut costs, leading to more layoffs and further reductions in spending.
Ordinarily, that would prompt the Federal Reserve to cut interest rates and shore up the economy. But that could be difficult if tariffs are also pushing up prices, making policymakers nervous that cutting interest rates could spur inflation.
“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.”
Most economists think such an outcome is relatively unlikely, however. Mr. Trump has repeatedly delayed full enforcement of his promised tariffs, for example — on Thursday, he suspended tariffs on most imports from Mexico and Canada until April. His deportation efforts have likewise gotten off to a slow start. And some of the cuts to the federal work force have been tied up in court.
Such delays and reversals will help blunt the impact of Mr. Trump’s policies, and could make a recession less likely, at least in the short term. But the prolonged uncertainty could have its own costs, leading businesses to delay investment and hiring decisions.
“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 the investment bank Piper Sandler. “Things just stop. Business confidence is muted, employment is muted, and capital spending is put on hold.”
Long-Term Costs
Even if Mr. Trump’s policies don’t cause a recession, they could do long-term damage. Lower immigration will leave the country with a smaller labor force as the native-born population is aging. Trade barriers will be a relatively modest drag on growth while in place — a chronic condition, rather than an acute one.
“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, a progressive group.
In certain places and for certain groups, the consequences could be harder to ignore. Veterans, who make up a disproportionate share of federal workers, could be particularly hard hit by government layoffs. So could parts of the country that depend heavily on federal jobs: Already, there are signs that home prices in the Washington metropolitan area are falling.
“It’s going to be substantial for certain communities,” said Gbenga Ajilore, chief economist for the Center on Budget and Policy Priorities, a liberal think tank. “When you look at the aggregate, you miss a lot of underlying detail.”