August 08, 2025
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Trump and the Economy
By Nayyer Ali MD
When Donald Trump came into office the US economy was looking to be in strong shape. Compared to pre-pandemic high point there had been a cumulative 13% growth in GDP, by far the best performance in the G7 advanced economies. Inflation, which peaked at 9%, had dropped below 2.5% and the Federal Reserve had felt confident enough that inflation was coming under control to finally start cutting interest rates. Job growth had been extremely strong over the last four years, with the share of working age population actually with a job near all-time highs. The only blemish to this outstanding record was the budget deficit, which was still too high for an economy near full employment.
But after six months of Donald Trump in office, all of these indicators are heading in the wrong direction. The trouble began with Trump’s imposition of tariffs on all foreign countries. The tariffs were so outlandish that Trump backed down from actually imposing them and put them on hold for a few months after Wall Street sold off sharply. Most investors figured Trump was just bluffing and would not seriously raise American tariffs. Tariffs are a sales tax imposed on imported goods and are paid by Americans, not by foreigners as Trump seems to think is the case. After much to and fro-ing, it seems Trump was quite serious about the tariffs, and the US is now charging an effective tariff rate of about 15% on all imports, with some exceptions. These tariffs are generating revenue for the government, but they will raise the costs of everything Americans buy that have any foreign components in them. Many big American retailers like Walmart bought large stocks in advance to get ahead of the tariffs and insulate their customers, but those stocks have mostly been run down now and price increases will start to hit American consumers.
While price increases will goose inflation higher, and it has already increased to 3% annual rate, the job market is slowing dramatically. The most recent jobs report shows that total job growth in 2025 has been minimal. The numbers were so bad that Trump had a tantrum and fired the head of the Bureau of Labor Statistics which is the government agency responsible for gathering the data that investors and the Federal Reserve rely on to understand where the economy is actually heading. This kind of interference with technocratic functions of the government will only lead to skepticism that any data that makes Trump look bad will be suppressed or concealed.
Trump meanwhile has been demanding the Federal Reserve lower interest rates, an action they chose not to do at their last meeting in July. The only reason for the Fed to lower rates is if inflation is under control and the economy is weakening. But inflation is rising, and Trump seems to think the jobs reports was not true and in fact the economy is doing just fine under his watch. If that were true though, then lowering rates would be the exact wrong move by the Fed and would only worsen inflation. In reality, we may be facing the dreaded “stagflation” where the economy fails to grow but inflation worsens.
Added to all this is the passage of Trump’s tax cut package by Congress. This tax cut was a terrible piece of legislation that gave the wealthiest a reduction in taxes while cutting Medicaid (the health insurance program that covers 80 million low income and disabled Americans) spending by over a trillion dollars in the next ten years. Under the new rules, a work requirement will be part of Medicaid. That doesn’t seem unreasonable, but the reality is that the the vast majority of Medicaid recipients already work or are disabled. The real purpose of the work requirement is to add a lot of paperwork to people’s lives that many will be unable to keep up with and thereby lose their insurance. The Republicans realize that taking health insurance away from 10 million people is not a vote winner, so they delayed the implementation of these rules till 2027.
Trump’s tax cut is also bad economic policy. It blows up the deficit even worse and provides a stimulus to an economy that was already quite strong in 2024. It makes it even more unreasonable for the Federal Reserve to cut interest rates.
Over the last 50 years two patterns have been quite obvious in the data. Republican Presidents preside over weak economies with frequent recessions combined with massive budget deficits. Democratic Presidents have presided over strong economies with rapid job growth and lower budget deficits. Under Clinton we even had budget surpluses.
Trump’s policy choices are setting up the US for several problems at the same time. We are going to experience high budget deficits and growing debt burden, weak job growth, slow expansion of GDP, and rising inflation. The Federal Reserve will have a challenge in trying to navigate these cross currents. The economy may avoid a recession, but if there are any further shocks to the system, a downturn is likely. Already Trump’s approval rating has slipped below 40%. A weak and unpopular Trump in 2026 will likely see Democrats make major gains in the midterms and set them up to take back the White House in 2028.
