Trump’s 2025 economy

A year ago, my column focused on the economic issues surrounding the presidential election. I concluded with, “If one side changes their top candidate, I predict they will win the presidential election.”  I was wrong. Kamala Harris stepped in after the Biden/Trump debate, yet Donald Trump will be our 47^th president. I’ll quit making political predictions.

While there were many issues swaying voters, Trump’s strong performance across all demographic groups suggests something very basic was driving his supporters. Clearly it  was not his character. It was inflation along with immigration. Voters were very sensitive to high inflation rates since everyone is affected, and once prices rise, they are resistant to dropping back down.

So here we are in 2025 with a new, former President with a supportive Senate and a close to evenly split House of Representatives. How will the changes in Washington impact the coming year and beyond? Will the sweeping changes “from day one” occur and set the economy on a course to MAGA? Will President Trump’s disdain for the vast majority of economists, the Federal Reserve, as well as climate and health science play out, or was he just hyping populist rhetoric to swing votes?

The coming year will be much like 2024. With Trump’s election we got a spike in the stock market as investors speculate on lower corporate taxes or at least a renewal of the 2017 tax cuts. Lower taxes are stimulative and potentially inflationary. Cranking up tariffs on China and imposing across-the-board tariffs on all imports will add to inflation within months, if not weeks. Tariffs should improve revenues for the federal government, acting like a national sales tax on approximately 20% of all consumer products. The higher prices on imports will also result in higher prices on some domestically produced goods as well. In the longer term such tariffs will be even more inflationary as production is moved from lower cost areas back to the U.S. with its higher labor costs.

Mass deportation is highly unlikely. Note Trump began modifying his rhetoric toward the end of the campaign to focus on illegal immigrants with criminal records. That’s about half a million people or 3.5% of the total undocumented immigrants in America. His efforts will be emotional — complete with visual images of roundups in the press. But success will be slow as people must be apprehended and then other nations must accept them. How will that happen? An undesirable economic consequence may be many undocumented workers leaving the workforce, creating a new round of labor shortages in certain industries. Strains on the labor force will also be felt as the bar for asylum is set higher in the courts, more cases are processed, and Congress potentially acts to radically change the nation’s immigration laws.

While little impact will be felt in 2025, President Trump will lay the groundwork to deregulate, thereby allowing markets to operate with fewer constraints. The Supreme Court rescinded the Chevron Doctrine last summer, stripping federal agencies of their ability to interpret ambiguous laws when implementing policy. This will keep the courts and lawyers busy and should lower costs. As the pendulum swings toward deregulation, one must ask what the negative externalities will be. The challenge will always be maximizing the freedom in free enterprise while promoting the public interest beyond employment, lower prices and the profit incentive, especially in the long term.

If astute, the Trump administration will implement one of Harris’ campaign platforms to increase the supply of housing by 2 million units by encouraging private development through federal action to curtail state and local land use and building impediments. Such state and local regulations slow housing development, promote lower density, and add a total of approximately 25% to the cost of a new home. Two million new units would increase new housing starts by one-third compared to historical levels. If targeted to the middle class, housing inflation will be stymied.

The federal government will continue to borrow heavily to fund historically high deficits outside of periods of war, pandemics and financial crises. Trump’s 2017 tax cuts increased the deficit to 4.6% of GDP before Covid from 2.5%. Those deficits have continued to increase under Biden to about 6%. Prudent macro financial management would get the deficit under 3% if not back into the black with a budget surplus during the good economy that we currently enjoy. In pursuing reasonable budget deficits, there will be temptations to cut programs that have emerged from Biden’s legislative efforts. Most at risk is the Inflation Reduction Act, which promotes investments to mitigate climate change. The Infrastructure and Jobs Act is also at risk even though it will disproportionately benefit Trump’s base in rural America. The CHIPS act will probably survive.

The momentum of 2024 should continue in 2025 with inflation around 2.5% to 3%, unemployment remaining steady, more public sector borrowing, slightly lower mortgage rates and a strong dollar as global capital flows continue seeking safer havens with reasonable returns for their capital. The real questions we need to be asking: How damaging to the long-term economic and environmental needs might Trump 2.0 be?

Tom Binnings is a senior partner at Summit Economics in Colorado Springs. He has more than 30 years of experience in economic and market research for public policy, strategic planning, business analytics and project finance. He can be reached at: [email protected]