The U.S. economy is often compared to a large ship, slow to change course. Initially, projections based on the economic strength inherited from the previous administration anticipated continued growth, low unemployment, decreasing inflation, and a thriving stock market. However, the current administration’s economic impact resembles a ship being damaged by its own weaponry.
The downturn in economic figures since the change in administration has been unusually swift and severe. The yield curve is inverted. Interest rates are declining because investors expect the Federal Reserve to intervene aggressively with rate cuts to rescue the weakening economy. Jobless claims have already increased, even before the full impact of government layoffs.
While economic data is backward-looking, leading indicators, which provide insight into the current and future economy, suggest a sharp decline in first-quarter GDP growth, with some forecasts predicting negative growth. A recession is typically defined as two successive quarters of economic contraction. Moreover, measures of economic policy uncertainty are comparable to or exceed levels during the peak of the COVID-19 pandemic.
These negative economic outcomes were avoidable and required significant policy errors to materialize.
Much of the discussion regarding this economic decline centers on the administration’s trade policy. While tariffs have demonstrably harmed the U.S. economy, focusing solely on them overlooks other equally detrimental policies. The frequent shifts in tariff policy have highlighted the potential implementation of previously dismissed economic ideas.
Consider the actions of the Department of Government Efficiency (DOGE) under Elon Musk. While the exact effect of workforce reductions is uncertain, the intention to undermine the federal government was explicitly stated during the campaign. Key figures advocated for disruptive changes to the bureaucracy and its funding.
It is now apparent that extensive federal layoffs will likely have a negative impact. More critically, the erosion of essential services provided by federal agencies, which often support private-sector activities, will hinder growth for years. Evidence of the value of these services is seen in the higher earnings and reduced working hours of former federal employees in the private sector. Claims that these employees were unproductive are demonstrably false. The federal workforce provides significant value, and arbitrary cuts are not efficient.
The administration’s pursuit of mass deportations, if implemented, would severely disrupt the supply-side of the economy, depriving businesses of necessary labor. This would lead to sharp price increases in the agriculture and construction sectors. The recent weakening of economic data likely reflects business leaders’ growing concern about these threats.
The administration’s policies are also deterring investment, even among Republicans, due to the volatile policy environment. Indicators of economic policy uncertainty are similar to those observed during the COVID-19 pandemic. The economic impact of the pandemic can be used as an example to quantify the significant negative impact of current policies.
During the previous administration’s first term, the economy performed reasonably well, with GDP growth and low unemployment. However, this success ended abruptly after three years due to the pandemic.
This time, the current administration has reversed a strong trend of economic growth in just two months through policy decisions that may be as destructive as a major pandemic in the eyes of consumers and business owners.
This negative outlook is why economic indicators are suggesting an impending economic collapse, as proposed policies are poised to deliver significant negative shocks to both the demand (Medicaid cuts and tariffs) and supply-side (deportations and federal layoffs) of the economy. For example, Medicaid cuts would force consumers to forgo healthcare or reduce other spending. Tariffs increase costs for consumers, while deportations decrease the available labor supply.
Without policy reversals, economists foresee negative consequences for the U.S. economy. Layoffs of federal employees and contractors are already affecting the private sector and state and local governments. The cuts will disproportionately affect the D.C. area, but most federal workers are located throughout the country. This will likely lead to rising unemployment rates. Declines in the stock market could also lead to corporate cutbacks. The trade war could hinder export growth and raise consumer prices. Potential Medicaid cuts could cause rural hospitals to close and decrease spending on other goods and services. Deportations will likely cause prices for food and housing to spike.
In summary, the current administration has embarked on a path of deliberate economic contraction. While there is still time to prevent significant economic hardship, action is needed urgently.