Macro & Oil Report: Is Donald Trump's policy good for the US economy?

Trump’s Economic Policies: Impact on the U.S. Economy

Since Donald Trump’s return to the White House, his economic policies have sparked debate, with early signs of strain on the US economy. While his first term was marked by tax cuts and a later trade war with China, his current administration is taking a more aggressive stance, reshaping trade and government administration.

Trump’s Radical Economic Shift

Unlike his first term, Trump’s return comes with a well-prepared, disruptive agenda. His policies focus on trade wars, government restructuring, and reducing foreign aid. His push for a quick resolution in Ukraine, linked to rare earth mining agreements, and efforts to cut military support for Europe, signal a strong economic motive behind geopolitical decisions.

Declining Consumer Confidence and Spending

While consumer spending fell by 0.5% in January, external factors such as extreme weather and wildfires played a role. However, the real concern lies in falling consumer confidence. After peaking in November, confidence dropped in December, January, and February, with growing fears about inflation and unemployment. Even Republican voters are starting to express doubts.

Inflation and Unemployment Fears

The fear of rising prices is fueled by new tariffs on imports, with Trump’s constant trade policy announcements amplifying uncertainty. Unemployment concerns are also increasing, partly due to Elon Musk’s restructuring of the federal government under the Department of Government Efficiency (DOGE). His aggressive cost-cutting measures have made government jobs unstable and introduced uncertainty in the private sector, affecting contractors dependent on federal programs.

Weakening Economic Indicators

Several indicators point to economic slowdown. The services purchasing managers’ index in services, which usually reflects consumer spending trends, fell below 50, signaling a contraction in activity for the first time since early 2023. Jobless claims have also started to rise, suggesting a weakening labor market. The real estate sector is experiencing difficulties due to the rising cost of credit, making it harder for Americans to afford homes or refinance existing mortgages. Additionally, the latest ISM manufacturing survey confirms fears of stagflation, as it highlights both a sharp rise in prices and a decrease in orders and employment.

Trade Deficit and GDP Slowdown

Trump’s tariff policies have also impacted trade. As businesses anticipated higher import costs, many rushed to make purchases before tariffs took effect. This led to a $30 billion surge in the trade deficit in January alone. As a result, the Atlanta Fed’s GDP forecast for Q1 2025 plummeted from +2.3% to -1.5%. The economic strain is likely to worsen in the coming months as tariffs on Canada, Mexico, and China fully take effect.

Financial Markets React

Since January 20^th, financial markets have reacted in unexpected ways. The Euro Stoxx 50, the main European equity index, has outperformed the S&P 500 by more than 10 points. This performance is partly due to a correction in US tech stocks, as well as a surge in European defense stocks driven by global geopolitical tensions. At the same time, the US dollar has weakened against the euro, and bond yield spreads have diminished by more than 40 basis points. After disappointing inflation data in January, markets expected the Federal Reserve to cut interest rates only once more in 2025. Now, investors are pricing in three rate cuts, signaling increasing concerns about economic deterioration.

Will Trump Change Course?

A shift in economic policy seems unlikely in the short term. Instead of softening his stance, Trump’s administration is escalating trade conflicts. Canada and China have already implemented retaliatory measures, Europe may be the next target and a reciprocal tariff policy is expected in April. Domestically, Trump continues to support Elon Musk’s radical restructuring efforts and even encourages a faster implementation of his policies.

The key question is how US businesses will respond if these policies start harming their interests? That is where any policy change may come from.