Donald Trump will be sworn in as the 47th president of the United States at 12 noon Eastern. When he takes the oath office for a second time at least one thing will be clear: He will enter the White House with an economy that’s in dramatically better shape than when he left four years ago.
The pandemic-ravaged economy of January 2020 is long gone. Although much has changed relative to the pre-pandemic economy, and not always for the better, it’s beyond debate that the US has rebounded sharply over the past four years. Compared with developed economies generally, the US is “the envy of the world,” as The Economist reported a few months ago.
There’s a fierce debate about how much of the US recovery is due to the natural snap-back following the pandemic-driven collapse vs. Biden administration policies. The answer probably lies somewhere in the realm of both factors played a role.
Meanwhile, current conditions reflect an upbeat profile, based on several metrics. Perhaps the most important economic change is the recovery in employment. Non-farm payrolls topped 159 million last month, exceeding the pre-pandemic peak. Unemployment in December was 4.1%–modestly higher compared with the 3.5% level on the eve of the pandemic’s start, but still near a historic low.
One challenge that Biden leaves his predecessor is the ongoing effects of inflation. Although pricing pressure has moderately sharply since surging in 2022, so-called “sticky” inflation risk prevails as the Federal Reserve continues to bring a roughly 3% inflation rate down to its 2% target. The good news is that recession risk remains low.
As reported in this week’s issue of The US Business Cycle Risk Report (a sister publication of CaptialSpectator.com), the probability that an NBER-defined downturn has started or is imminent is currently below 5%.
Next week’s fourth-quarter GDP report is expected to reaffirm the economy’s strength. The Atlanta Fed’s GDPNow model is nowcasting a 3.0% increase in output (as of Jan. 17), essentially matching Q3’s strong 3.1% advance.
The Trump administration, in short, enters office with an economy with a solid tailwind. The uncertainty is how the president-elect’s plans on multiple fronts will reshape the macro trend? The incoming president has promised substantial policy changes on immigration, tariffs, taxes, regulation and foreign policy and an “end to the devastating inflation crisis,” as Trump as explained.
He’s also promised to implement numerous changes through executive orders within hours of becoming president — “close to 100” on his first day in office.
There’s much debate among economists about what’s coming. Although some analysts expect economic growth will strengthen, others are wary.
“There’s no clear path forward at this time for how to meet all these goals because they’re inherently contradictory,” says Romina Boccia, director of budget and entitlement policy at the Cato Institute.
A key risk that may haunt the new administration is the rising tide of federal debt. Politico reports:
Over the next decade, the U.S. national debt — already more than $36 trillion — will break multiple records as it “swells” to 118 percent of the nation’s economic output by 2035, the Congressional Budget Office estimated in its yearly “baseline” projections. Lawmakers use this information as a measure to craft the bills they aim to pass.
Trump’s nominee for treasury secretary, Scott Bessent, warned last week: “We do not have a revenue problem in the US. We have a spending problem.”
The question is whether Trump 2.0 is willing to make the painful but necessary decisions to put the US fiscal house back on a sustainable path and repair the damage left from the Biden administration?
The worry is that Trump’s plans to extend tax cuts, without sharp spending cuts elsewhere, will exacerbate an already troubling trend for the state of US fiscal affairs.
This much is obvious: With Republicans in charge of both houses of Congress and the White House, Trump 2.0 will own whatever happens over the next four years.