The turbulent economic policy under Donald Trump has significantly increased economic uncertainty and is a burden on the US economy. Above all, the very significant tariff increases will have a dampening effect on the economy and increase price pressure. Even after the announced postponement of the most dramatic tariff increases, many far-reaching trade policy measures remain in place – against China but also on automobiles or steel and aluminum. Whether the US economy will slide into a recession is still open. The risks have undoubtedly increased, and at least a significant economic cooling seems certain at the moment.
In the fourth quarter of 2024, the US economy still expanded solidly by 0.6 percent compared to the previous quarter (annualized 2.4 percent). Overall, the US economy grew robustly by 2.8 percent in 2024. The growth was supported by private consumption throughout the year. In the final quarter of 2024, it even expanded at a rate of 1.0 percent. Public consumption and business investments also showed robust growth. At the end of 2024, housing construction investments, which had long been weak, developed somewhat more dynamically.
At the beginning of the year, concerns about the economic development of the US economy have increased significantly. Private consumer spending declined in January and only increased slightly in February. There was a rebound in March. Households probably consumed more because they expected higher tariffs and prices in the future. At the same time, household sentiment has cooled noticeably. Above all, concerns about an increase in inflation and unemployment have increased significantly. At least industrial production has developed solidly, and the purchasing managers‘ indices also indicated a slight expansion of the US economy. Imports saw a very strong increase in January. Apparently, concerns about possible tariff increases have led to anticipatory effects among companies and households.
The labor market situation was still robust recently. In March, 228,000 new jobs were created. However, the labor market reports for January and February were less encouraging. Only 111,000 and 117,000 new positions were created. The unemployment rate in March was still at a low 4.2 percent. However, the rate of underemployment – those who would like to increase their workload – has increased somewhat. This indicates that the labor market may have started to cool.
The development in the further forecast period is characterized by high uncertainty and depends significantly on the economic policy decisions under President Donald Trump. At present, it can be assumed that the across-the-board increase in tariffs to 10 percent will remain in place. The sectoral tariffs on automobiles, steel, and aluminum, as well as at least part of the tariff increases on Chinese imports, are also likely to continue to apply. Stock prices have corrected significantly downward and are very volatile. In a base scenario, where such crises do not occur, the United States can expect a slight contraction of gross domestic product in the summer half-year. After that, the US economy should expand slightly again. But even in 2026, the tariff shock will not yet have been digested.
At the same time, federal budget debt will rise significantly, and trade policy measures are likely to increase inflationary pressure. Compared to the same month of the previous year, inflation in March was still at 2.4 percent (Consumer Price Index), thus still above the central bank’s target value. Core inflation, which excludes energy and food prices, increased by 2.8 percent compared to March 2024. Against this background, given the inflation-driving policy measures, no key interest rate cuts are expected for the time being. The continued increased inflationary pressure and the decline in economic output assumed here in the summer of 2025 are likely to present the central bank with a dilemma. In addition, inflation expectations have risen significantly recently and threaten to become entrenched at this high level. It is assumed here that there will be no interest rate cuts until the summer. After that, in the base scenario, the gradual subsiding of inflation increases will give the central bank room for an interest rate cut in the third quarter.
Most analysts now expect the US economy to expand only slightly on average in 2025 and 2026. According to IMEN, there will be a mild recession in the summer half-year. Private consumption will roughly stagnate, and the situation in the labor market is likely to deteriorate. Business investments, which had grown dynamically in recent years, are likely to decline in view of weak domestic demand and fewer exports. In housing construction investments, a tentative upswing can only be expected in 2026, given lower interest rates and a slight economic recovery.
All in all, the US economy is likely to grow by only 1.0 percent in the current year on average, mainly thanks to a still relatively solid start to the year and robust growth in the end of 2024, which influences average annual economic growth rates. Average growth rates mask the recession in the summer half-year. In the fourth quarter of 2025, gross domestic product will be 0.2 percent lower than in the fourth quarter of 2024. On average for 2026, the US economy is likely to expand at a rate of only 0.8 percent. Inflation is likely to remain at 3.5 percent in 2025 and fall slightly to 2.5 percent in 2026.
Kommentar verfassen