In just a few weeks, the American economy has gone from enjoying a bullish and reasonably optimistic phase to discussions about rising inflation, profit declines, and even a possible recession in the first half of the year. There are many underlying elements, but at the core are the policies of the new Donald Trump administration, from immigration measures limiting labor to the wave of tariffs, including the abrupt cuts in the administration, including the dismissal of tens of thousands of people.
Trump and his team have stated that in the short term, there may be minor turbulence, especially in prices, but that the benefits would undoubtedly outweigh the drawbacks. However, neither the markets, analysts, nor institutions see it the same way. In recent days, an almost perfect and self-inflicted storm has begun to take shape, leading to corrections in the stock markets amid a highly uncertain outlook.
The models of the Atlanta Federal Reserve have raised alarms. With real-time data on prices, consumption, or business and citizen confidence, their annualized data anticipate a possible contraction of up to 1.5% in the first quarter of the year, compared to the 2.3% growth estimated just a few weeks ago. The American economy grew by 2.8% last year, with a strong closing of +0.6% in the last three months, making the drag effect potent.
However, the signs coming from all directions not only put pressure on the Executive but also on the Fed itself, which is now back against the wall. The next monetary policy decision, in two weeks, will have to be made with a possible stagnation on one side, which would suggest further interest rate cuts, and the already recorded price increases this year, pushing to keep rates high to prevent overheating. All this amid tremendous pressures from the administration, which wants and needs assistance from the central bank just as activity slows down, mainly driven by the downsizing of the government, agency closures, frozen funds for allocated programs, and mass layoffs.
If it is assumed that inflation will increase due to tariffs, and that the labor market will likely worsen rather than improve due to public layoffs and cost adjustments by companies facing increased expenses, then the likelihood of a moderate stagflation occurring begins to be high. Last week, Walmart, the retail giant, warned that profits for 2025 would be greatly affected, and this Tuesday, Target's CEO announced immediate price increases to offset the impact of tariffs on China, Mexico, or Canada, and the additional ones coming on April 2.
When dealing with economies experiencing overheating in activity, most factors driving inflation tend to eventually equalize wages with prices over time. But inflation caused by tariffs is different. Prices rise, but there is no reason to expect wages to catch up, immediately and structurally damaging purchasing power.
"The Atlanta Federal Reserve has now revised its real-time estimate of first-quarter GDP growth downward to -2.8%. Surely, part of it is noise, but it is too significant to be just that. I used to think that the expansion would continue until 2026, but fears of Musk's layoffs and the greater-than-expected uncertainty and chaos in policies may mean that the recession will occur sooner. If so, what will Trump do? Will he try with all his might to get the Federal Reserve to drastically cut rates? Will he double down on fiscal expansion? Will he fire Musk?" points out Olivier Blanchard, former chief economist of the IMF and one of the most reputable macroeconomic analysts.
Trump made economic attack one of his pillars in the campaign, especially regarding inflation and the cost of living. In the last year of Joe Biden, there was much movement and recession fears, while the Fed kept a tight rein to control inflation, arising with the rise in oil prices, devastating hurricanes, and even dockworkers' strikes. But it was avoided.
However, nerves are starting to reach the White House and the entire economic apparatus of the administration. Countries affected by the new tariffs have all stated they will respond with similar measures, further escalating costs. The GDP will inevitably feel the impact. So much so that Elon Musk, responsible for the mass layoffs, and Trump's economists are starting to look for scapegoats and claim that the indicators are misleading and other measures should be sought.
"A more accurate measure of GDP would exclude government spending. Otherwise, GDP could be artificially inflated by spending money on things that do not improve people's lives. For example, moving everyone who manufactures cars to work at the Department of Motor Vehicles. This would result in no cars and a much lower standard of living, but GDP would appear the same!" Musk wrote, one of his many messages on his platform railing against statistics now turning against him.
Commerce Secretary Howard Lutnick said on Sunday on television that public spending should be separated from reports on gross domestic product, amid real fears of causing an economic recession. "Historically, governments have manipulated GDP," Lutnick said on Fox News. "They count public spending as part of GDP. So I will separate those two and make it transparent."
The irony is that if Musk's suggestion were followed and GDP were excluded (which is already measured), the country's figures would worsen. In the GDPNow model, the Atlanta Federal Reserve's, public spending continues to show a positive contribution to GDP. The main reason for the decline was the massive wave of imports in January to avoid Trump's tariffs. On Thursday, the Bureau of Economic Analysis of the Department of Commerce published its latest report on GDP, showing that the economy grew at an annual rate of 2.3% in the last three months of last year. Largely thanks to increased consumer spending and an upward revision of federal government defense-related spending. Both elements are now moving in opposite directions.