Donald Trump vowed to “unshackle” America’s economy on Tuesday night, but beneath the US president’s bullish rhetoric to Congress are mounting concerns over growth.
The Trump-induced trade war lies at the heart of the fears that an economy that has recently been a central driver behind global growth is now on the turn, analysts said.
Sentiment among manufacturers has softened and the trade deficit has surged amid corporate stockpiling ahead of the introduction of levies on major US partners.
Cuts to the federal workforce and government spending are also weighing on confidence, while the clampdown on immigration is raising concerns about companies’ access to labour.
An equity rally that followed the November election has fizzled, erasing gains triggered by Trump’s victory over Kamala Harris, as the “animal spirits” investors say were unleashed by his return to office begin to droop.
What is driving the concerns?
Trump’s decision this week to impose tariffs on imports from its three biggest trading partners — 25 per cent on Canada and Mexico, coupled with an additional 10 per cent levy on Chinese imports — raises the prospect of higher costs for US consumers and businesses.
The tariffs, if maintained, would add about half a percentage point to core personal consumption expenditures inflation by the final quarter of 2025, coupled with a “large but uncertain” hit to GDP, said Krishna Guha at Evercore ISI.
Core PCE annual inflation, which rate-setters at the Federal Reserve monitor closely for signs of underlying price pressures, is now 2.6 per cent. Headline annual PCE is 2.5 per cent — well above the Fed’s 2 per cent goal.
Coupled with Trump’s plans to bear down on immigration, the US may be facing a “stagflationary shock”, said Joe Davis, global chief economist at investment firm Vanguard.
With uncertainty about Trump’s economic policies threatening to dampen investment, Davis said 2025 could see “a mirror image” of the soft landing and exceptionally strong growth witnessed in the US last year.
Investors now expect the Fed to lower rates by about three-quarters of a point by the end of 2025, against expectations of just one cut earlier this year.
What does the data show so far?
Recent data has fallen shy of analysts’ expectations and pointed to signs that growth in consumer spending — the cornerstone of the US’s exceptional economic performance since the pandemic — is slowing.
Nominal personal spending fell 0.2 per cent between December and January, short of predictions of a 0.1 per cent increase and the largest fall since early 2021.
Adjusted for inflation, personal consumption was down 0.5 per cent with large falls in sales of durable goods, particularly cars. US retail sales also fell by a larger than expected 0.9 per cent between December and January.
The Conference Board’s closely watched measure of consumer confidence slid seven points in February to 98.3, the steepest decline since August 2021 and worse than the 102.5 that analysts had anticipated.
Spending on construction also fell 0.2 per cent between December and January.
While the ISM manufacturing index remained in positive territory in February, an index of new orders dropped sharply, in a sign of the disruption that could accompany Trump’s trade war. Carmakers are seen as acutely exposed.
Efforts by Elon Musk’s so-called Department of Government Efficiency to slash the fiscal deficit and cut jobs could also hit economic activity, prompting commerce secretary Howard Lutnick to suggest publishing a measure of GDP that separated out government spending.
Ahead of Friday’s non-farm payrolls figures, however, it remains hard to tell how much effect the administration’s initial actions are having on the ground.
How are forecasts looking?
A tracker of first-quarter growth from the Atlanta Fed has attracted attention in recent days after it fell deep into negative territory.
The GDPNow indicator dropped on Friday last week to show an annualised decline of 1.5 per cent, and it was marked down further to minus 2.8 per cent this week.
Underlying data from the Atlanta Fed shows the fall was heavily influenced by a surge in the US trade deficit.
The gap between exports and imports of goods jumped by more than 25 per cent in January from the previous month to $153bn — a leap economists believe was driven by companies stockpiling imported products ahead of Trump’s tariffs.
A surge in gold imports from Europe to New York — again driven by tariff fears — may have also played an outsized role in the sharp drop in the Atlanta Fed tracker.
Due to differences in the way GDP is officially calculated, the GDPNow measure may overstate the scale of the deficit and therefore the drag on first-quarter growth.
Patrick Higgins, an economist at the Atlanta Fed, said the accuracy of the central bank’s model would strengthen in about a month’s time as more data for February comes in.
Some economists, including at Barclays and Goldman Sachs, have cut their growth expectations for the first three months of the year and 2025 as a whole in the wake of the trade figures.
But the average forecast for annualised growth in the first quarter is still a reasonably robust 2.2 per cent, according to a survey by Bloomberg — slightly slower than the official 2.3 per cent reading for the fourth quarter.
The first official estimate for GDP for the first quarter is out on April 30.
Are worries becoming overblown?
While confidence indicators have taken a dive on the back of the Trump-induced policy uncertainty, there are still signs the US economy is strong.
Personal income growth rose 0.9 per cent between December and January, pushing the saving rate up 1.1 percentage points to 4.6 per cent over the same period.
Samuel Tombs, of consultancy Pantheon Macroeconomics, noted that private sector data showed auto sales recovered in February, alongside a pick-up in commercial bank consumer credit lending in recent weeks. That could, however, be because “many consumers still are bringing forward purchases of high-value imported goods due to the risk of tariffs”.
Most economists are expecting a relatively positive performance for the year as a whole, with analysts polled by Consensus Economics over the past week predicting US growth at about 2 per cent in 2025, down from 2.8 per cent in 2024.
The threats to that picture are mounting, however. As Trump himself acknowledged on Tuesday evening, the tariffs were set to cause “a little disturbance”.
If he persists with a strategy of ripping up trade relationships with the US’s biggest partners, that could prove to be an understatement.
Additional reporting by Delphine Strauss in London