Moody's Report: Trump's Policies to Slow U.S. Economic Growth, Avoid Recession

What's Happening?

A report from Moody's Analytics indicates that President Trump's economic policies are expected to slow U.S. growth and increase inflation, but will not lead to a recession or stagflation. Economist Justin Begley notes that while the policies will diminish growth, they will not push the economy to the brink of recession. Trump's policies include tax cuts, increased spending on border security and defense, and tariffs on imports such as steel, aluminum, and foreign cars. These measures are expected to offset positive growth catalysts, leading to a reduction in economic growth by an average of 0.4 percentage points annually during Trump's term.

Why It's Important?

The report highlights the complex impact of Trump's policies on the U.S. economy. While tax cuts and increased spending are typically growth stimulants, tariffs and immigration crackdowns are expected to counteract these benefits. The tariffs are likely to increase consumer prices, reducing purchasing power and consumption, which constitutes 70% of economic activity. Additionally, deportations may lead to a reduced workforce, driving up wages and prices in sectors like construction and agriculture. The report suggests that without these tariffs, Trump's policies might have a slightly positive effect on growth.

What's Next?

The Federal Reserve faces a challenge in balancing interest rates to support a softening labor market without exacerbating inflation. As Trump's policies continue to unfold, the economy is projected to grow at a slower pace, with inflation peaking at 3.1% in 2026 before declining. The unemployment rate is expected to peak at 4.7% in 2027. Stakeholders, including businesses and policymakers, will need to navigate these economic shifts, potentially adjusting strategies to mitigate the impact of tariffs and immigration policies.

Beyond the Headlines

The report suggests that the anticipated retaliation from foreign countries to Trump's tariffs has been less severe than expected, which may have mitigated some negative impacts on U.S. exports. Additionally, the logistical challenges in deporting immigrants have resulted in fewer deportations than initially projected, which could lessen the anticipated economic strain. These factors contribute to a less dire economic forecast than previously predicted.