In our previous update, we noted that by the end of 2024, most major economies were in a balanced state, often referred to as “Goldilocks” – not too hot with issues like inflation and labor markets, nor too cold with economic growth. They are poised to start 2025 with strong momentum.
For the U.S., 2025 could be a transformative year, partly due to the upcoming election. We are keen to explore how proposed policy changes might impact the economy.
The U.S. Election and Economic Uncertainty
The upcoming U.S. election is anticipated to bring about some uncertainty. President Trump’s 2024 campaign includes significant trade and immigration policy changes, such as a 10% universal tariff and 60% tariffs on China, along with stricter immigration controls.
These proposals mirror policies from Trump’s first term, where tariffs were used as negotiation tools with other countries, often not fully implemented. Similar strategies might be expected in the upcoming term, adding uncertainty, especially for companies with international supply chains. The Trade Policy Uncertainty index had surged during Trump’s first presidency and has reached new highs ahead of his inauguration.
Trump’s Economic Policies and Their Potential Impact
Trump’s platform also includes tax cuts and deregulation, which could benefit companies and, consequently, stocks. Observing data from his first term provides insights into possible economic outcomes in his second term.
Initially, tariffs under Trump focused on China, prompting companies to alter their suppliers or supply chains. This shift led to a reduction in China’s share of U.S. goods imports to nearly 13%. Other regions like Taiwan, Korea, Vietnam, Mexico, and the Eurozone benefited from this adjustment.
For his second term, Trump proposes broader tariffs, likely targeting countries with larger net exports to the U.S. to reduce the trade deficit and strengthen U.S. supply chains. Countries such as Mexico, China, and Vietnam might be key focus points, with proposed tariffs of 25% on Canada and Mexico.
For U.S. companies relying on imports, tariffs could increase costs, which might be passed on to consumers, potentially adding to inflation. However, considering the manufacturing sector accounts for only about 10% of the U.S. economy, the overall inflation impact might not be as significant as anticipated.
Immigration Restrictions and Labor Supply
Immigration restrictions could reduce the labor supply, leading to higher wages. In Trump’s first term, similar effects were seen due to COVID-19, which significantly impacted labor supply through early retirements, enhanced unemployment benefits, and reduced visa issuance.
As the economy recovered, labor shortages led to wage growth, particularly for job switchers, contributing to the “sticky” inflation observed in 2024.
Trump’s proposed immigration restrictions might have a milder effect compared to COVID-19. Industries heavily reliant on unauthorized immigrants, such as professional services, leisure and hospitality, construction, and agriculture, could face higher wages to attract workers, slightly adding to inflation.
Tax Cuts, Deregulation, and Market Impact
Trump’s policies, including lower taxes and deregulation, are expected to enhance company valuations. His pro-business approach suggests reduced regulatory burdens, lowering costs for companies. Additionally, potential M&A activities could drive up stock prices.
Trump aims to make his 2017 tax cuts permanent and further reduce the corporate tax rate to 15% from 21%. After the previous tax cut, company earnings saw a significant increase, suggesting potential profit boosts with further reductions.
Market Reactions and Economic Outlook
Economists believe deregulation and tax cuts might spur growth and profits. However, tariffs and immigration restrictions could increase inflation and potentially hinder trade and growth over time.
Recent market trends show a divergence in short- and long-term interest rates. While the Fed has cut rates, long-term rates have risen, indicating expectations of stronger growth and higher inflation in the future.
Labor Market and Consumer Spending
The key question is whether higher interest rates might slow the economy more than tax cuts and deregulation can boost it. Data shows rising interest rates have notably affected smaller companies, impacting hiring plans.
Despite this, higher wages have attracted more workers, and layoff rates remain low, supporting consumer spending. A robust labor market is crucial for economic stability in 2025, with further rate cuts and tax reductions potentially sustaining growth.
U.S. consumer spending has been a key driver of the economy, bolstered by a strong job market and rising wages. Continued economic growth in 2025 will depend on maintaining a healthy labor market.
The information provided is for informational and educational purposes only and should not be considered investment advice. Neither Nasdaq, Inc. nor its affiliates make any recommendations regarding securities. Investors should conduct their own due diligence and consult a securities professional before investing. © 2024. Nasdaq, Inc. All Rights Reserved.
