Moody’s Analytics chief economist, Mark Zandi, paints a mixed picture of the US economy as President-elect Donald Trump prepares to take office. While the current economic climate shows impressive growth – with a GDP expanding at around 3%, strong productivity and business formation, and a robust stock market – Zandi cautions about potential economic headwinds in the coming year. He highlights incoming Trump administration policies, particularly concerning immigration and tariffs, as major sources of uncertainty and potential economic disruption.
Moody’s Zandi Predicts Economic Turbulence Under Trump’s Presidency
Key Takeaways:
- Current economic indicators like GDP growth, productivity, and the stock market are exceptionally strong.
- Zandi forecasts significant economic impacts from Trump’s proposed policies on immigration and tariffs.
- Mass deportations of immigrants could negatively affect labor supply and economic growth.
- Broad tariffs are projected to raise consumer prices significantly and stifle business investment.
- Low-income households are expected to be hardest hit by potential tariff-induced price increases on essential goods.
A Currently Robust Economy – But Storms on the Horizon
Zandi’s assessment presents a complex picture. He acknowledges the current economic strength: “The economy is doing ‘exceptionally well’,” he stated at the Consumer Federation of America’s financial services conference. Key indicators support this positive outlook. GDP growth hovering around 3% demonstrates sustained expansion. High productivity and business formation rates indicate a dynamic and thriving private sector. And the stock market’s upward trajectory reflects investor confidence. Zandi emphasized the economy’s resilience, declaring, “The economy can weather a lot of storms“. However, he immediately tempered his optimism, adding, “I do think there are some potential storms coming” under the new administration.
The Looming Threat of Policy Uncertainty
The source of Zandi’s concern lies squarely in President-elect Trump’s announced policy plans. He anticipates swift action on two particularly impactful fronts: immigration and tariffs. Zandi believes Trump will faithfully execute his campaign promises, adopting “quite aggressive” policy measures. This uncertainty, fueled by the potential for significant policy shifts, casts a shadow over an otherwise strong economy.
The Impact of Immigration Policy
Zandi highlights the crucial role of immigration in the current economic strength. He points out that recent immigrants have significantly contributed to the labor supply, particularly in sectors experiencing labor shortages. This sentiment is echoed by Goldman Sachs analysts, who wrote in a May note: “Recent immigrants have flowed disproportionately into the parts of the labor force that were particularly tight in 2022, contributing to labor supply in places where it was most badly needed.” A significant reduction in immigration through mass deportations, as proposed by the Trump administration, would likely create labor shortages in key sectors, potentially dampening economic growth and increasing wages in those sectors where labor is scarce.
The Far-Reaching Effects of Tariffs
The potential impact of Trump’s proposed tariffs is even more concerning, according to Zandi. He states that such measures would generate “a whole lot of uncertainty for businesses,” potentially leading to significant job losses. Beyond the direct effect on businesses, tariffs are also predicted to drastically affect consumer spending. Zandi unequivocally stated that, “It’s going to mean higher costs for consumers — it’s a tax increase.“
A Detailed Look at Tariff Impacts: The National Retail Federation’s Report
A report by the National Retail Federation (NRF) paints a stark picture of the potential price increases resulting from Trump’s proposed across-the-board tariffs. The NRF’s analysis projects “dramatic” price spikes, with double-digit percentage increases across various retail categories. Such a broad-based implementation of tariffs would affect numerous products ranging from clothing and toys to furniture, household appliances, and travel goods.
For example, the cost of clothing is projected to rise between 12.5% and 20.6%. The report illustrates this using the example of a $80 pair of jeans potentially costing between $90 and $96. These price increases would significantly impact consumer budgets but especially low-income households who, according to the NRF report utilizing Bureau of Labor Statistics data, spend three times as much of their after-tax income on apparel as high-income households.
The Overall Economic Outlook
While the US economy is currently performing exceptionally well, Moody’s Zandi’s analysis suggests a potential shift towards economic uncertainty with the incoming Trump administration. Zandi anticipates that aggressive policies on immigration and tariffs will likely offset the current positive economic trends. This assessment highlights the potential for a significant negative impact on both the labor market and consumer spending. While the magnitude of the negative economic effects remains uncertain, the potential for serious disruption requires close monitoring. His warnings underscore the need for careful consideration of the potential consequences of significant policy shifts and their impact on diverse segments of the population.
