The Economist: America faces a Trumpian economic slowdown

“The golden age of America begins right now.”

So declared Donald Trump on January 20 in his inaugural address.

In the six weeks since that chilly day, investors and economists have started to grapple with a less upbeat possibility: that his arrival in the White House is both causing and coinciding with a period of weakness for America’s economy.

For now, such worries are apparent in surveys about the economy rather than hard data itself, which still exhibits momentum from last year.

Ordinary Americans have turned gloomy. A closely watched consumer-sentiment index published by the University of Michigan plunged in February, dipping to its lowest since 2023.

A separate gauge of consumers’ expectations published by the Conference Board, a business-research group, showed a similarly precipitous drop in February, hitting a level that suggests a coming contraction.

Looming large in the public concerns is the potential for a rebound in inflation, stemming from Mr Trump’s appetite for tariffs.

He has vowed to implement his latest tranche on March 4, with 25 per cent levies on imports from Canada and Mexico and another 10 per cent on Chinese goods.

Such concerns may already be spilling into actual behaviour.

Retail sales in January were unexpectedly weak, with consumer spending down 0.5 per cent in real terms from a month earlier, the biggest decline in nearly four years.

There are also slight cracks in the labour market: initial claims for unemployment insurance last week rose to 242,000, matching their highest since October.

Investors are catching the gloomy mood.

Stocks rose strongly after Mr Trump’s election victory as they anticipated his deregulatory and tax-cutting agenda.

More recently, though, the market has edged down, falling by 2 per cent in the past month.

A high-frequency tracker of GDP growth, published by the Federal Reserve’s branch in Atlanta, points to a contraction of 1.5 per cent in the first quarter of 2025, an abrupt reversal from just a few weeks ago. (Since it is still early in the quarter for economic data, the GDP estimate is, for now, highly imprecise and volatile.)

This is not just about Mr Trump. Most obviously, his policies have barely started to gain traction.

The economy is also affected by much more than just the programme of the Oval Office’s occupant.

The property market, an important determinant of economic health, is under pressure from high interest rates.

In January pending home sales fell to their lowest since 2001, when the National Association of Realtors started collecting such data.

Moreover, survey results are clouded by politics: respondents who identify as Democrats are now bearish; Republicans are more sanguine, in an inversion of their attitudes when Joe Biden was in office.

Beyond the noise, a few themes stand out, and they mostly hint at an intensification of worries in the coming months.

Even if Mr Trump again delays imposing levies on Canada and Mexico, as he did a month ago, he seems determined to raise tariffs on friends and foes alike — a more aggressive lurch towards protectionism than in his first term.

As higher prices weigh on consumption and manufacturing, his tariffs could lop off a percentage point from America’s growth rate, according to analysts at Morgan Stanley, a bank.

Measures of uncertainty about trade policy have spiked higher, meaning businesses may restrain from making investments.

Many investors still hope that Mr Trump will cut taxes and slash red tape. Yet the balance of risk seems to be shifting.

The budget blueprint passed by Republicans in the House of Representatives on February 25 would extend most of Mr Trump’s tax cuts made in 2017, while doing little to expand on them.

The result would be fiscal policy that keeps the deficit enormous — at about 7 per cent of GDP — without providing much extra kick to the economy.

In the meantime, efforts by Elon Musk and his Department of Government Efficiency to reduce the size of the civil service are creating a chaotic impression.

His downsizing appears to be generating limited savings but extensive disruptions to government functions, from managing national parks to doling out social assistance.

A few broader trends may also be working against Mr Trump.

Consumers have used up the extra cash that they accumulated during the COVID-19 pandemic, so they may need to start saving more again, which will reduce spending.

The incredibly rich valuations of American stocks, especially the tech giants that boomed over the past few years, are vulnerable to a correction — something that could further damage consumer and business sentiment.

And the property market will remain under strain so long as mortgage rates are flirting with 7 per cent, not far from their highest in two decades.

Regardless of who was in power, all these trends would have portended slower growth.

With an aggressive and erratic protectionist in the White House, the downshift might come sooner and be sharper.