A stronger economy was a core promise of Trump’s presidential election campaign, but as he began his second term in the White House early this year the economy shrank amid the rollout of his unexpectedly aggressive tariffs. The average US import levy shot to nearly 17% in Trump’s first year from less than 3% at the end of 2024, according to Yale Budget Lab.
Economists expect fourth-quarter growth to slow substantially, reflecting the impact of the six-week federal government shutdown that began October 1, but with the reopening that drag will reverse in the new year.
There are many risks: A weakening labor market, still-elevated inflation, and a central bank deeply divided over which of those dueling problems to focus on.
Meanwhile Trump is poised to pick a new Fed chair to take over when Jerome Powell’s term ends in May. Whoever he picks is universally expected to push for lower interest rates.
Also read: Trump’s tariffs shake global trade, raise costs and fuel market volatility
This year the US job market steadily slowed, with monthly job gains down sharply from what they were a year ago and the unemployment rate ticking up, key reasons that Fed policymakers did coalesce around a string of interest-rate cuts in the final months of the year. The unemployment rate was 4.6% in November, though economists said the reading was distorted by the lack of data collection during the government shutdown.
Stubbornly elevated inflation may limit further rate cuts next year.
While third-quarter inflation was much more muted than expected, economists say it was not a clear indicator and likely understated real price pressures. Meanwhile it will take months to bear out whether tariff-driven goods inflation will indeed fade as many policymakers now expect.
Household concerns over the weaker job market – evident in the latest data from the Conference Board showing a deterioration in consumers’ perceptions of the labor market to levels last seen in early 2021 – have some economists predicting families will save rather than spend the extra money from the Trump tax cuts.
And while businesses may gain from investment in AI if it helps them do more with fewer people, employees and job-seekers may not benefit in the same way.
“We expect the unemployment rate to stabilise at 4.5% as hiring picks up on the back of stronger final demand growth,” wrote Goldman Sachs’ economist David Mericle. “Further labor market softening is the largest downside risk to our forecast because hiring is starting from a weak place and the promise of AI might restrain it further.”
