As we look forward to 2025, there are several critical factors shaping the economic landscape. While some of my previous predictions may not have materialized as expected, I take comfort in the words of Theodore Roosevelt: “The only man who never makes a mistake is the man who never does anything.” Mistakes are inevitable when making predictions, but they reflect my willingness to engage with complex economic issues.

At the start of this year, my economic outlook for 2025 revolved around the theme “Three Yards and a Cloud of Dust,” which anticipated slower growth and a decline in inflation pressures. However, recent events have led me to reconsider the likelihood of a significant reduction in inflation. This shift brings us to the concept of President Donald Trump’s “Four Buckets,” which are likely to have profound effects on economic conditions.

What are Trump’s Four Buckets?

In considering the economic landscape, I have identified four major areas of policy action—what I call Trump’s “Four Buckets”—that could influence growth and inflation rates:

1. Tax Law Changes: Reductions in taxes.
2. Tariff Changes: An increase in tariffs, particularly on imports from China and other nations.
3. Deportation of Illegal Immigrants: A shift in immigration policy that could reduce the labor force.
4. DOGE Efforts: Government initiatives to streamline and reduce federal spending.

These four factors have the potential to significantly alter the economic trajectory of 2025. While some of these actions could reduce growth or increase inflation, others may have the opposite effect.

A Strong Start but Rising Risks

When President Trump takes office, he will inherit a relatively strong economic situation. Unemployment is at 4.1%, GDP growth stands at 2.5%, and inflation is at 2.9%. However, challenges remain, notably the record deficits left by the previous administration, which could add downward pressure to future economic growth. At this stage, though, we are setting aside these broader risks and focusing on the specific elements that will drive economic outcomes in 2025.

Key Economic Drivers in 2025

My baseline forecast for GDP growth in 2025 remains modest, with expectations of a 1.5% to 2.5% growth rate. Meanwhile, inflation is projected at 2.6%. However, these estimates could change depending on the timing and execution of Trump’s policies. Specifically, the policies on tariffs and immigration could put upward pressure on inflation while potentially slowing economic growth.

Early Policy Moves: No Congressional Approval Needed

Certain elements of Trump’s economic agenda—specifically, tariff hikes and immigration actions—don’t require congressional approval, which means we may see early movement on these fronts. These two areas could have significant effects on both inflation and growth. Tariffs, in particular, are likely to increase the cost of imports, which could lead to higher consumer prices, adding to inflationary pressures.

Economic Forecasts Adjusted

The latest polling of economists reveals a slight upward revision in inflation expectations for 2025. Initially, many had predicted inflation would be around 2.3%, but this has now been raised to 2.7%. The increase is largely due to the anticipated effects of Trump’s proposed actions, particularly the tariffs and immigration policies.

Inflationary pressures may also arise due to the potential for higher labor costs if immigrants are removed from certain sectors of the workforce. Many industries, such as agriculture, construction, and hospitality, rely heavily on undocumented workers. If these workers are replaced with higher-wage employees, it could increase costs in these industries and put upward pressure on prices.

Impact of Tariffs

Tariffs are often viewed as a consumption tax, and economists (myself included) generally believe they increase prices for consumers. If tariffs are raised, importers will face higher costs, which could be passed on to consumers. In addition, some importers may choose to stop bringing goods into the U.S. altogether, further limiting supply and raising prices.

Trump’s proposal for a 20% tariff on all non-North American imports—and possibly 25% on imports from Canada and Mexico—would have a significant impact on consumer prices. While tariffs can protect national security interests, they also come with economic consequences that must be considered carefully.

The Effect of Tax Cuts and Spending Reductions

While tariffs and immigration policies are likely to add inflationary pressure, the potential for tax cuts and government spending reductions could offer a counterbalance. However, these actions may take longer to implement as they may require congressional approval. If enacted, these policies could help stimulate economic growth by reducing taxes on businesses and individuals, encouraging investment, and reducing government waste.

Weighing the Risks

The overall economic outlook for 2025 remains uncertain. While Trump’s policies could lead to higher inflation and slower growth in the short term, the full impact may not be felt until later in the year or even into 2026. With inflationary pressures possibly rising, the Federal Reserve’s plans to reduce interest rates might be delayed or altered.

However, we are in an era of heightened uncertainty, and my own outlook carries a relatively low probability of success—around 60%. Many variables are in play, and with a new administration taking charge, the potential for significant shifts in economic policy is high.

Conclusion: Brace for the Unknown

Ultimately, the economic situation in 2025 remains fluid, and we must prepare for the unexpected. While predictions are difficult in such uncertain times, it’s clear that Trump’s Four Buckets will have a considerable influence on the economic landscape. The effects may not be fully realized until 2026, but for now, we wait to see how these factors will unfold.

As we navigate through these changes, it’s important to stay informed and ready for the unexpected. The winds of change are strong, and we may be in for a bumpy ride ahead.