In the face of President Trump’s tariffs, the U.S. economy is proving resilient but hardly remarkable.
Spending more on industrial policies, Medicaid and Food Stamps, President Biden increased the federal deficit from 4.6% of GDP in 2019 to 6.2% last year.
That turbo-charged demand and pushed unemployment below 4% by 2023. But payroll employment kept on expanding aided by hundreds of thousands of illegal immigrants joining the workforce.
Now Trump’s tariffs and deportations are braking the pace.
He wants to reshore more manufacturing—or at least diversify imports away from China to strengthen supply-chain security—but businesses elsewhere in Asia and here can’t always find enough factory workers.
Trump’s tough negotiating tactics are yielding some results—Canada rescinded its Digital Services Tax aimed at making American High Tech pay Ottawa’s bills. But moving supply chains even for simple items like home furnishing and lighting equipment is expensive and arduous.
Businesses are delaying many investments until they know what the tariffs will be and the foreign market access they can expect.
No matter what Trump does, this is set to be a difficult year for consumers.
COVID shutdown excess savings ran out last year, households borrowed more to continue spending and are now more stressed to service that debt.
Upper income consumers increasingly carry the economy, but inflation and job security worries are stressing them too.
Tariffs are taxes. They reduce real disposable buying power, and in recent months, real household spending was mostly stagnant.
By shutting down illegal immigration and threatening foreign workers with deportations, Trump is slowing workforce growth and exacerbating low-skilled labor shortages in food processing, agriculture, construction, child and home health care and nursing homes.
Over the last six months, new employment slowed to 130,000 per month, down from 168,000 in 2024.
The economy likely grew about 0.8% in the first half of this year and won’t perform too much better in the second half.
Beyond specific industries and job categories heavily concentrated with immigrants, the broader labor market looks stressed.
Meat packers and other manufacturers can’t find enough workers. Unemployed white collar workers are increasingly challenged to find new employment—in no small measure because businesses are using Artificial Intelligence to make and sell more stuff with fewer workers.
In Washington, the power of institutions often appears inversely related to the size of the structure it inhabits. Omnipresent congressmen toiling at the Capitol seems less effective than omnipotent presidents at the smaller White House complex. The omniscient Supreme Court, which can squelch laws and executive orders, resides in even smaller space.
A relatively small building houses the Federal Reserve Board—but it has the power to print money.
Pols and financial commentators in both the progressive and conservative camps believe that makes Chairman Powell as powerful as the Wizard of Oz.
Generally, the Fed creates money to buy short-term bonds and regulates those purchases to adjust the overnight lending rate among banks. In turn, those should push up or down longer rates, for example on the 10-year Treasury, and spur growth by influencing the rates charged on consumer loans ranging from credit cards to mortgage rates.
Faced with the prospect of inflation arriving later his summer from his unpopular tariffs and deportation policies and fearing these could cause a recession, President Trump has been harassing Chairman Powell and threatening to designate a replacement many months before his term ends.
But when Powell cut rates by a full percentage point from last fall, the 10-year Treasury rate rose by about a percentage point instead of going down.
The huge supply of U.S. debt in global markets frustrates the Fed’s intentions.
It appears Powell has the power to pour teacups of ice water into warming global oceans.
Even if he could lower the temperature in credit markets, he can’t inspire unemployed project managers, administrative assistants, lawyers and insurance adjustors to pick lettuce, take factory jobs or babysit the elderly and infirm.
Monetary policy is no good for structural problems that require Americans to accept they erred going to college and that more teenagers should learn trades useful in manufacturing and high- tech services.
Only then would factories be able to adequately expand. In turn, that would create more jobs for the fewer college grads in a labor force that would be more realistically balanced to support healthy growth.
In the meantime, we need a more thoughtful immigration policy that stresses filling skill gaps in our indigenous workforce.
Leaning too much on easy-money would generate more inflation than growth.
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Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
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