As we enter 2025, the political landscape has shifted with President-elect Trump preparing to take office once again. This change raises important questions about how his proposed policies could affect the U.S. economy in the coming years. While our previous economic outlook for 2025, titled “Three Yards and a Cloud of Dust,” remains our core projection, it’s crucial to consider the potential influence of Trump’s proposed economic plans. This outlook envisioned a slow-growth economy with moderate inflationary pressures, but with Trump’s return to the White House, new risks and uncertainties are on the horizon.

Trump has outlined several key policies that could significantly impact economic growth, inflation, and other macroeconomic factors. In this blog post, we break down the four main areas of his proposed changes, or “buckets,” and discuss how these could shape the economy in 2025 and beyond.

The Four Economic Buckets

Trump’s economic agenda can be broken down into four key areas:

1. Tax Law Revisions: Extending and enhancing the Tax Cuts and Jobs Act (TCJA) of 2017.
2. Increased Tariffs: Raising tariffs on imports, particularly from China.
3. Immigration and Deportation: Tightening immigration policies, including the deportation of undocumented immigrants.
4. Government Efficiency: Streamlining government functions and reducing federal regulatory burdens (DOGE).

Each of these areas holds potential to significantly alter the economic environment, though the exact timing and extent of these changes remain uncertain.

The Impact of Tax Law Revisions

Trump’s tax proposals include extending the TCJA provisions, reducing business taxes, and permanently expensing capital investments. The tax cuts would amount to one of the largest changes in tax law in recent history, potentially cutting federal revenue by approximately $300 billion annually over the next decade. However, this could also increase GDP growth by about 2.4% in the long term. The immediate effect of the tax changes, particularly on inflation, might be minimal, but they could spur businesses to increase capital spending, leading to higher worker productivity over time.

Despite the potential benefits, the full impact of these tax changes won’t be felt until 2025 or 2026, as they still require approval from both the House and Senate. Therefore, the economic benefits of the tax reforms will take time to materialize.

The Consequences of Higher Tariffs

One of the most talked-about aspects of Trump’s economic policy is his plan to raise tariffs. The proposed increases would raise tariffs on Chinese imports to 60% and impose a 20% tariff on other foreign imports. This would bring tariff rates to levels not seen since the Great Depression, which could drive up costs for consumers and businesses alike.

While the tax cuts are expected to boost economic growth, the increased tariffs could offset some of those gains. According to modeling from the Tax Foundation, approximately 65% of the GDP growth benefits from tax cuts could be lost due to the economic drag caused by higher tariffs. The tariffs could also result in retaliatory measures from other countries, further affecting trade dynamics. The overall result could be a higher government deficit and increased inflationary pressures, as consumers bear the cost of higher prices on imported goods.

Given the potential for rapid implementation, especially if “national security” is cited as the reason for the tariffs, the effects of these policy changes may start to be felt sooner than other aspects of Trump’s agenda. However, the full impact on the economy might be more pronounced in the longer term.

Immigration and Deportation Policies

Trump’s proposed immigration reforms, specifically the deportation of undocumented immigrants, could have significant implications for certain labor-intensive industries. Estimates suggest there are around 14.4 million undocumented immigrants in the U.S., with a significant portion working in sectors like agriculture, construction, and hospitality. If large numbers of these workers were deported, wage pressures could rise in these industries, as businesses struggle to fill labor gaps.

While these changes may address political and social concerns, they would likely have minimal macroeconomic benefits. The economic impact of deportation policies may not be fully realized until 2026, depending on how aggressively the policies are implemented.

Reducing Government Regulations (DOGE)

Another key aspect of Trump’s economic plan is to reduce government spending and regulatory burdens on the private sector, a policy known as DOGE (Department of Government Efficiency). The pandemic has significantly increased federal government spending, and Trump’s aim to streamline government operations could reduce waste and inefficiencies.

If successful, these efforts could yield substantial economic benefits by freeing up resources for private sector growth. Estimates suggest that DOGE’s initiatives could save up to $2 trillion in proposed spending cuts. While the exact savings remain uncertain, reducing government inefficiency could lead to a more vibrant economy.

Expected Impact on Growth and Inflation

While the full impact of these policies won’t be felt immediately, the overall effect on the U.S. economy in 2025 may include slower GDP growth and upward pressure on inflation. The combination of higher tariffs and immigration reforms could contribute to reduced economic activity and higher consumer prices. Meanwhile, the potential for tax cuts and government efficiency measures could provide some positive offsets, though these may not fully materialize until later years.

Our core economic outlook for 2025, “Three Yards and a Cloud of Dust,” remains a cautious one. We expect slightly lower economic growth and inflation than in 2024, but the introduction of Trump’s policies will likely bring greater uncertainty and volatility. While the impact of these changes will not be fully realized in 2025, they could significantly affect the economic trajectory in 2026 and beyond.

Conclusion

As we move into 2025, it’s clear that President-elect Trump’s economic agenda will bring significant changes. However, the timing, implementation, and full effects of these policies are still uncertain. For now, we maintain our outlook of slow, steady growth and a gradual decline in inflation for the upcoming year. The true economic consequences of Trump’s proposals will take time to unfold, but their potential to shape the U.S. economy in the years ahead is undeniable.