Trump stares down early economic potholes

Axios

06-03-2025

Buy your local economist a drink: The economic backdrop is more chaotic and uncertain than it's been in years — a result of fast-moving and sometimes vague Trump policy.
Why it matters: There is a growing list of factors that could put downward pressure on the economy — tariffs, spending cuts, a looming government shutdown and more.
America's economy has defied naysayers, but there is no guarantee that continues.
Forecasters are writing GDP and inflation estimates in pencil, warning that their models can't possibly account for all the ways the jumble of policies could net out.
What they're saying:"It's really drinking from a fire hose at this point," Brian Gardner, chief Washington strategist at Stifel, tells Axios.
"Trying to understand where things are going is unusually difficult, historically difficult," Gardner adds.
Where it stands: The Atlanta Fed's GDPNow model, a "nowcast" that uses released data to estimate GDP in real-time, suggests the economy is contracting sharply.
That is almost certainly not the case, but it is a signal of the huge question marks about what's ahead for the economy.
The backdrop
Trump's epic trade war: The longer the North American and U.S.-China trade war lasts, the more damage it risks for the economy.
Trump said automakers would get a month-long reprieve from Canada and Mexico tariffs. It was welcomed by the auto industry, though it injected more uncertainty about what happens after the delay.
More tariffs are on the horizon in the weeks ahead, including a reciprocal plan on April 2 that Trump has called "the big one."
DOGE spending cuts: Tens of thousands of federal workers have been fired or taken a buyout, with more layoffs to come, though some efforts have been halted by federal judges.
Government employees make up a small share of the overall workforce, but the effects of nixed contracts could ripple out to the private sector.
Shutdown threat: Congress has until March 14 to pass a bill to fund the government or risk a shutdown.
Republicans want to pass a budget that chops spending to pave the way to enact Trump's fiscal agenda — a difficult task without cutbacks to politically sensitive (and expensive) entitlement programs.
A prolonged shutdown would delay the data releases necessary to gauge any economic impact from the factors listed here.
Tax cuts: Some CEOs say the extension of Trump 1.0 tax cuts could offset potential economic weakness from the trade war.
Concerns about blowing out the deficit might hamper that effort.
The price tag is ballooning. In a congressional address, Trump called for no tax on tips, overtime or Social Security benefits. He pitched tax-deductible interest payments on loans for U.S.-made cars.
Immigration: The construction industry has warned about the potential double-whammy from deportations that could dent labor supply.
Two other factors to watch
Interest rates: The Fed has adopted a wait-and-see approach as inflation looks more sticky and White House policy remains in flux.
Some economists warn that the trade war could keep inflation high and slow the economy, forcing the Fed to choose: elevated rates to control inflation, or lower rates to contain economic fallout.
AI adoption: In the background of all these factors is questions about how quickly companies are folding AI into their business models — and the ultimate impact on productivity and workforces.
Companies are investing (or planning to invest) billions of dollars into data centers to power AI that, if fully materialized, might boost the economy.