It’s not just tariffs: US growth risks are piling up under Trump

Washington - US President Donald Trump’s latest trade-war salvo, the largest act of American protectionism since the 1930s, will likely put the brakes on US growth in the near term – and it is just one of the shocks piling up for increasingly nervous consumers, businesses and investors. 

There are also Mr Elon Musk’s cuts to the federal workforce, the clampdown on immigration and a potential drag on business investment amid so much policy uncertainty. Add it all up, says the growing consensus among economists, and it spells a slowdown for the world’s biggest economy.

Few see much danger of outright contraction in 2025, and there are growth-friendly measures like tax cuts in the pipeline too. Still, the spectre of “Trumpcession” has been raised. An escalating tit-for-tat trade war would only amplify it – and Mr Trump has made plain that many more tariffs will follow the ones he just imposed on Mexico, Canada and China.

Future targets include the European Union, autos, pharmaceuticals and semiconductors – as well as the “reciprocal” tariffs that Trump aides are calculating based on various barriers to US goods overseas. 

The tariff wave is cresting amid already-clear signals of slower growth and higher inflation. Consumer spending fell by the most in nearly four years in January and confidence has weakened. Factory activity fell back in February, while a gauge of prices paid for materials surged to the highest since June 2022.

Analysts caution against reading too much into a single month of data, especially one skewed by severe weather. The Atlanta Federal Reserve’s GDPNow real-time forecasting tool on March 3 predicted a 2.8 per cent first-quarter contraction, but it is an outlier. Most indicators aren’t pointing to a severe downturn.

Goldman Sachs Group chief executive David Solomon said on March 4 that there is a “very small” chance that the US economy tips into a recession.

Businesses and consumers

Businesses and consumers will feel the impact of the new taxes on some US$1.5 trillion (S$2 trillion) in US imports, more than two-fifths of the total. As of March 4, the average US tariff rate stood at the highest level since the 1940s. 

That alone is enough to raise the possibility of a period of stagflation, or slow growth and high inflation, according to econimists Maeva Cousin and Rana Sajedi of Bloomberg Economics. “These tariffs will act as a negative supply shock for the US economy,” they wrote.

Calculations based on models used by the Federal Reserve during the first Trump administration suggest the latest tariff shock could cut 1.3 per cent off US GDP and lift core inflation by 0.8 per cent.

Economists at Yale’s Budget Lab predicted a growth shock of about half that size in 2025, but warned of scars that could persist for years. Even after production shifts and supply chains reorganise, Trump’s latest tariffs and retaliation by others will shave 0.4 per cent off long-run GDP, they wrote – “the equivalent of the US economy being permanently smaller by US$80 billion to US$110 billion annually”.

Moody’s Analytics chief economist Mark Zandi said: “If all of the announced and threatened tariffs are actually implemented and remain in place, then the typical American family will need to shell out as much as US$1,300 more a year to purchase the same goods they did last year.”

Those same families recently got whacked by a post-Covid-19 surge in the cost of living – which helped Mr Trump get elected, most pundits reckon – and there are clear worries that it is bubbling up again. Inflation expectations over the coming year are the highest since 2023, and one longer-run survey points to a multi-decade high.

Beyond the direct hit on consumer wallets, there are risks to industrial production and manufacturing jobs too. Both declined in 2019 during Mr Trump’s first-term trade war. 

The US auto industry, some 2.5 per cent of the economy, is profoundly exposed, as giants like Ford Motor are loudly warning. Its supply chains have grown deeply entwined with Canada and Mexico over decades. Even a short term disruption could wipe a percentage point from annualised gross domestic product growth, according to Citigroup – and Mr Trump says separate car tariffs are coming too.

Immigration crackdown

Meanwhile, the mere threat of steel and aluminium duties slated for March 12 has already led to a surge in domestic prices that is raising costs for companies like Calder Brothers.

The South Carolina-based firm makes paving machines used for driveways and car parks, which retail at an average US$200,000. On top of the recent steel-price increase, it is getting squeezed by tariffs on components sourced overseas, like gearboxes and hydraulic valves. The company is mulling an unusual mid-year price increase, said Mr Glen Calder, its president.

“These tariffs really punish the small US manufacturer,” he said. “There’s a lot of concern over what’s going to happen to pricing on a lot of things.”

If tariffs are top of mind for US growth-watchers right now, there are plenty of other administration policies raising red flags too.

The crackdown on illegal migrants, already under way, threatens to leave gaps in the workforce that will not be easy to fill quickly – especially in some key industries like meatpacking. 

Deportations carried out so far by the Trump administration likely will not hurt the economy too much. But Goldman Sachs economists say a broader immigration slowdown, with fewer net arrivals a year, could strip as much as 40 basis points off potential growth compared with recent years.

Govt cutbacks

Cutbacks driven by Mr Musk’s Department of Government Efficiency have seen more than 100,000 federal workers lose their jobs already, with knock-on effects for many contractors. Doge may not be enough to cause a recession on its own, but by moving fast and breaking things, it “amplifies the recession risks in two key ways”, according to economist Claudia Sahm. 

“First, it concentrates the economic effects temporally, and second, it creates uncertainty that can weigh on growth and employment,” she wrote on March 4. And that’s against a backdrop of already-slowing growth, still-high interest rates and snowballing tariffs, Ms Sahm points out.

Mr Trump has acknowledged that Americans may feel “some pain” from the trade war – but says the long-term gains from his agenda will be huge. The administration says tariffs, deregulation and tax cuts that have begun working their way through Congress will combine to drive an investment boom.

As evidence that its hawkish trade policy is bearing fruit, Mr Trump’s team points to the recent pledge by Taiwan Semiconductor Manufacturing Company (TSMC), the world’s top producer of artificial intelligence chips, to invest an additional US$100 billion in US plants. Another key part of the policy mix is cheap energy. There are signs that Trump has persuaded oil powerhouses Saudi Arabia and Russia to heed his calls for output increases – which could push pump prices down and offer some relief to US consumers battered by tariffs. 

The US economy has repeatedly proven its resilience, and defied recession forecasts. Still, the Trump shocks are piling up, according to Ms Stephanie Roth, chief economist at Wolfe Research.

“If you were to design something that is really quite negative for the economy,” she told Bloomberg TV, “this is it.” BLOOMBERG