The Economy and Markets in 2025
The Presidential Orders are coming at a breakneck speed and volume that is unprecedented. The primary subject matters impacting the economy have been tariffs and immigration.
This has created great economic uncertainty, a high level of market volatility and increasing concerns about executive over-reach (i.e. President exceeding his constitutional powers or just trying to do too much too fast and too soon without thinking through the ramifications and short and longer term levels of impacts).
There have been three kinds of tariffs imposed by the President: across the board, sectoral and reciprocal. The across-the-board tariffs of 10% are meant to raise federal revenues and are likely here to stay. The tariffs on lumber, steel, aluminum, cars, and other sectors. are meant to improve our balance of trade payments; they are likely to stay for the next year or so, but some may come off earlier, depending on negotiations. The reciprocal tariffs are meant to promote negotiations with Trump over his priorities: e.g. Mexico and Canada – immigration; Europe – increased defense spending. We’ll have to see what happens in 90 days when they expire (July 7). If they are implemented, they could wreck international trade and the global economy as well as the US.
We are entering a time of great economic uncertainty that holds the peril of stagflation. Consumers are freaked by this and will be reluctant to spend, causing the economy to tank. Businesses are uncertain and unlikely to make investment decisions when the ground is constantly changing under their feet. Higher inflation will be generated by the tariffs; it could either be a one time increase in prices of 10% or it could become a long-term problem as inflationary expectations set in for American businesses and consumers.
We have had an overvalued stock market (bull market); starting in January of 2025, that collapsed by about 15%. The high hopes of some businesses for the Trump Administration have not been fulfilled, to put it gently.
Three major issues are at play during the rest of 2025 that Congress will need to decide by fall, maybe Christmas. This will have to be done with all Republican votes; Democrats will not be voting for the massive changes that Trump and the GOP are/will be proposing in tax cuts for the rich and deep program cuts for those Americans of low and moderate incomes. See https://budgetmodel.wharton.upenn.edu/issues/2025/2/27/fy2025-house-budget-reconciliation-and-trump-tax-proposals-effects The debt ceiling increase, the annual budget and the tax bill are intertwined and could be taken up together.
The tax bill. Trump’s 2017 tax bill expires at the end of the calendar year; its tax cuts primarily inured to the very rich and large corporations. The projected 10 years cost of continuing it is about $4.5 trillion. https://taxfoundation.org/research/all/federal/trump-tax-cuts-2025-budget-reconciliation/ Trump’s campaign made a series of campaign promises to cut taxes: e.g, no taxes on tips, no taxes on Social Security payments, removing the cap on SALT (state and local tax) deductions, etc. The added cost of enacting over 10 years is estimated at $4.5 trillion. https://www.crfb.org/blogs/trump-tax-priorities-total-5-11-trillion Bond markets will likely react negatively to a big increase in the national debt.
Debt ceiling of the US needs to be increased, or we default on national debt, and sink the US dollar, the US economy and our full faith and credit around the world. The timing is uncertain, but coming up soon. House Republicans are looking at a $4.5 trillion increase. They will have to mollify both the extreme right and bond markets; both will want cuts to offset the tax bill. Republicans are looking to pair the debt ceiling increase with the program budget cuts and the tax cuts and do the whole ball of wax in a reconciliation bill requiring only a simple majority.
The annual Budget bill is supposed to be passed before the end of September. House Republicans are looking to cut the Medicaid program, Food Stamps, Student Loans, and the Veterans Administration quite deeply — about $2 billion over 10 years. https://www.cbpp.org/press/statements/house-budget-would-increase-costs-and-hardship-for-many-while-providing-huge-tax This is politically very risky and could cost them control of the House in 2026, and they understand that; fifteen GOP House members have already issued a warning to their leadership about their unwillingness to vote for the bruited Medicaid cuts. While this should be done by the end of the federal fiscal year on September 30, it could slip ‘til just before Christmas as it has done in the past. It is also highly perilous for hospitals, nursing homes, doctors, health plans and consumers/patients and will impact their ability to stay in business and even more importantly stay alive.
We should expect continued volatility in the economy, the stock and bond markets due to high levels of economic uncertainty for the 1st three quarters of 2025. Trade may freeze up, a recession has become increasingly likely, and there could be shortages. By the 4th quarter or the end of the year, there should be a clear economic blueprint on which American businesses and consumers will be able to make their economic decisions.
In the US, we have enjoyed 15 years of American “exceptionalism”, reflected in the faster growth of the US economy and its higher stock values as compared to our competitors in other nations. This attracted global investors and their money into the US markets. That is over.