WASHINGTON (AP) — Like most presidents, Donald Trump faces an economy that rarely bends to political ambition.
The Republican has promised forceful growth, high tariffs, income tax cuts and booming oil fields. Despite the solid labor market and low unemployment rate of 4.1%, he faces headwinds including inflation, a budget deficit, heightened tensions over trade, the impact of his plans to restrict immigration and a persistent wealth gap.
Any of these issues could contribute to how voters feel about a president they saw returned to the White House with the specific goal of fixing the economy.
Trump, for his part, wants to blame all the challenges before him on his predecessor, Joe Biden, who had to blame Trump in 2021 for the problems that his own administration had to address.
“This begins with confronting the economic chaos caused by the last administration’s failed policies,” Trump told the World Economic Forum on Thursday.
Here are five economic forces that could impact the first year of Trump’s presidency:
For voters, the price is still not right
Whip inflation is easier said than done.
In AP Vutecast, a comprehensive survey of voters last year, 4 in 10 voters cited inflation as the “single most important factor” in their choice for president. About two-thirds of that group voted for Trump – a sign he owes in immense part to the high costs of food, gasoline, housing, cars and other goods.
Going forward, monthly consumer price index reports will be a clear measure of whether Trump can deliver. However, inflation has actually increased in recent months. Consumer prices rose at a vigorous annual rate of 2.4% in September, up from 2.9% in December. Economists say inflation could worsen if Trump imposes tariffs and uses deficit-financed income tax cuts.
Republicans often hit Biden challenging on egg prices. But Democrats could operate similar attacks on Trump. Last year, the cost of coffee for U.S. consumers rose just 1%, but the International Monetary Fund has raised the price of the actual beans, which are rising 55% in a sign that lattes, espressos and plain venerable cups of joe, will soon cost more.
Then there are apartments. Voters are still frustrated by high mortgage rates and prices that remain elevated due to a shortage of housing. Shelter is 37% of the consumer price index. Housing price increases have strengthened, but shelter costs are still rising at a rate of 4.6% per year, compared to an average augment of 3.3% before the pandemic.
Trump is betting that more energy production can lower inflation rates, but the administration says domestic production is already near record levels.
What tariffs are really coming?
According to Trump, 25% tariffs on Mexican and Canadian imports will be imposed by February 1st. He has also discussed additional 10% tariffs on Chinese goods. Its stated goal is to stop illegal border crossings and the flow of chemicals used to make drugs like fentanyl.
For Trump, tariffs are a diplomatic tool for his political goals. But they are also a threat that may be designed to jump-start trade talks. They’re also a revenue bully that he claims could bring trillions of dollars into the Treasury.
Trump increased tariffs in his first term, more than doubling revenues at an annual cost of $85.4 billion, which may sound a lot, but was only 0.4% of gross domestic product. Multiple analyzes from the Budget Lab at Yale and the Peterson Institute for International Economics say, among other things, that the threatened tariffs would raise costs for a typical family in a way that effectively raises taxes.
What really matters is whether Trump delivers on his threats. That’s why Ben Harris, a former Biden adviser who is now director of economic studies at the Brookings Institution, says voters should focus on average tariff rates.
(*5*) Harris said.
What will happen to the national debt?
Trump likes to blame national debt inflation and says Biden’s policies have flooded the U.S. economy with more money than it can absorb. But about 22% of the $36 trillion in total outstanding debt came from Trump’s first-term policies, according to the Committee for a Responsible Federal Budget, a fiscal watchdog.
Paul Winfree, a former Trump aide who is now president and CEO of the Economic Policy Innovation Center, warned in a recent analysis that the U.S. is getting too close for its fiscal limits. His analysis suggests that if Trump can maintain 3% growth, he can extend his expiring 2017 tax cuts while keeping debt sufficiently stable by reducing spending from $100 billion to $140 billion per year year lowers.
The risk is that higher borrowing costs and debt will limit what Trump does while keeping borrowing costs high for consumers. Lawmakers who once viewed the debt as a problem year are increasingly seeing it as something they should address now.
“One of the biggest swings I’m seeing among policymakers now is that they’re starting to realize that the long term is today,” Winfree said.
Winfree said the crucial number to watch is interest rates on U.S. debt – which will tell the public if investors think the borrowing amount is problematic. The interest rate on the 10-year US Treasury note is around 4.6%, which has reached a full percentage point since September.
Immigrants are still needed to fill jobs
Trump’s executive orders are a clear crackdown on immigration – and that could be a drag on economic growth and sluggish down monthly jobs. Trump often frames immigration as a criminal and national security issue, focusing on people crossing the border illegally.
But economies that can’t add enough workers risk stagnation – and the U.S. labor market at this stage needs immigrants as part of the job mix. According to the Census Bureau, about 84% of America’s net population growth last year came from immigrants. That’s 2.8 million immigrants.
“They not only work in the economy, but they also spend in the economy,” said Satyam Panday, chief U.S. economist at S&P Global Ratings. “Your spending is someone else’s income in the economy.”
If Trump were to simply reset immigration at his average of 750,000 immigrants per year for 2017 and 2019, growth could sluggish to 2% from an estimated 2.7% last year, according to Panday’s analysis. The construction, agriculture and leisure and hospitality industries would likely struggle to find employees.
In other words, it’s worth monitoring the monthly jobs report and immigration flows.
Consider the wealth gap
Trump needs to figure out how to balance the interests of billionaires with those of his blue voters. His first events included some of the richest men in the world: Tesla’s Elon Musk, Amazon’s Jeff Bezos, Meta’s Mark Zuckerberg and LVMH’s Bernard Arnault. Each is worth around $200 billion or more, according to the Bloomberg Millionaire’s Index.
Scott Ellis, a member of the group Patriotic Millionaires, said it’s worth monitoring how much their wealth increases under Trump. This year, as of Friday, Arnault’s net worth is up $23 billion, Bezos is up $15 billion, Zuckerberg is up $18 billion and Musk’s net worth is up $6 billion. These are all monthly increases.
In contrast, the most recent data available from the Census Bureau shows that the average U.S. household wealth increased by $9,600 to $176,500 in 2021-2022.
