Last year, President Trump confidently entered the White House, believing he could manage the economy after a prolonged period of high inflation and widespread financial dissatisfaction among voters.
This article looks into several economic aspects from the first six months of his second term—covering taxes, tariffs, market performance, and their impacts on the average American.
Trade War 2.0
Trump has notably expanded upon the trade policies he initiated during his previous term.
As of August 1, his administration rolled back certain country-specific tariffs, unveiling several sketches of bilateral trade deals. Currently, US tariff levels are the highest they’ve been in over a century, largely attributed to tariffs on China.
Current estimates place China’s tariff rate around 50%, raising concerns about a decoupling between the world’s two largest economies.
A recent report from the Yale Budget Lab indicated that the total US tariff levels have reached 20.2%, while Fitch’s ratings put it at 14.1% last month. These rates can be calculated in various ways, leading to a broad range of statistical results.
While Trump has announced trade agreements with nations like China, Japan, Vietnam, Indonesia, and the UK, many specifics remain unclear.
These tariffs may soon show up in consumer prices, with the Consumer Price Index (CPI) projected to rise up to 2.7% annually in June, an increase from 2.4% in May, likely spurred by tariffs.
Many economists, including those from the Federal Reserve, regard tariffs as problematic, indicating they push prices up while hindering economic growth.
Initial GDP reports for the first quarter showed a reduction in imports as businesses prepped for upcoming tariffs. The Atlanta Fed forecasts an annual growth rate of 2.4% for the second quarter, which is fairly strong.
Trump’s trade war aims to bring back outsourced jobs and enhance household incomes, but there’s little evidence this is currently happening.
Wage growth dipped from a 4.2% annual increase in February to 3.9% in June. And, wage stagnation has been a long-term issue in the US. When adjusted for inflation, purchasing power saw only a slight increase from 1964 to 2018.
Manufacturing, which Trump has highlighted as thriving due to tariffs, has stagnated at 12.8 million jobs since February.
Tax Reduction 2.0
Earlier this month, Trump enacted a $4.5 trillion tax cut, primarily extending cuts from 2017.
This tax legislation marks a significant achievement for Trump and congressional Republicans, passing through Congress quicker than analysts anticipated. Experts had predicted it wouldn’t finalize until year’s end, especially given differing strategies between the House and Senate.
However, these tax cuts are quite costly, expected to contribute significantly to the national debt. Excluding interest, this law is calculated to add $3.4 trillion over the next nine years to a US debt already approaching $36 trillion.
This increase in debt has led to downgrades in US credit ratings by major institutions, requiring Congress to impose acceptable limits. The tax legislation also raised ceilings by $4.1 trillion, temporarily avoiding a political crisis.
Future cuts in social programs could go toward repaying this debt. It’s estimated that tax cuts will remove about 10 million Americans from public health insurance by 2024.
While tax cuts are usually seen as a stimulus, congressional scoring expected minimal growth of only 1.8% from the Senate’s version of the bill.
The Congressional Research Service noted a mere 1.2% rise in real wages following the 2017 tax law changes.
When discussing the impact of the tax legislation, Professor Avyona from the University of Michigan highlighted its redistributive nature, pointing out that the Congressional Budget Office sees it as benefiting the wealthy at the expense of the poorer sectors.
“It’s essentially the opposite of what Robin Hood did,” he remarked in an interview.
The Dollar Decline
Since Trump took office, the US dollar has depreciated against various other currencies.
The DXY Dollar Index, for instance, has fallen 11% from 109.4 to 97.3 during his tenure, despite tariffs hitting their highest levels in nearly a century.
This has left analysts puzzled, considering the implications.
A weaker dollar may lessen purchasing power overseas but could potentially enhance US industrial production and export sectors, aligning with US economic aims.
“I favor a strong dollar, yet a weaker dollar can mean higher earnings,” Trump commented recently.
“While we do have a weak dollar, it’s beneficial for sales; it. Makes it easier to sell products like tractors or trucks,” he added.
Some economists at the White House also discuss the positive aspects of a weaker dollar.
Earlier this year, Stephen Milan, chair of the Council of Economic Advisers, mentioned that the dollar’s function as a reserve has caused long-standing currency distortions.
He previously stated that a consistently overvalued dollar hampers international trade dynamics, largely driven by an inelastic demand for reserve resources.
In short, discouraging investors from favoring the dollar could have competitive advantages for the US.
Some analysts liken the dollar’s decline to the Plaza Accord of 1985, which devalued the dollar and helped reduce trade deficits.
The financial world is starting to witness outcomes from this decline.
“Risk seems balanced compared to the past three years; the dollar has returned to a fair value range,” observed a Vanguard analyst recently.
Attack on the Fed
The first six months of Trump’s second term have included vocal criticisms directed at the Federal Reserve and its chair, Jerome Powell.
Last week, Trump reportedly suggested to GOP lawmakers the possibility of dismissing Powell, though he claimed that it was “very unlikely.”
The Fed appears willing to maintain its current pause on interest rate cuts, but Trump’s criticisms are echoing within financial markets and shifting discussions about monetary policy.
Economists express concerns that ongoing pressure from the White House may compromise the Fed’s independence, rendering it more susceptible to political influence.
There are fears that this may result in greater tolerance for inflation, risking long-term benefits of capital investments.
Some of Trump’s supporters have even challenged the longstanding agreement that permits the Fed to manage the money supply independently of the Treasury Department.
Kevin Warsh, a former Fed governor often mentioned as a possible successor to Powell, has suggested a “new agreement” that would allow for better communication between the Fed and Treasury regarding monetary movements.
Market Decline
The stock market initially surged in response to the onset of Trump’s trade war, particularly following announcements that diverged from deals with China.
This narrative has shifted, and the S&P 500 index recently reached record highs.
Stock ownership is alarmingly skewed, with the wealthiest Americans holding the majority of stocks, while the bottom half own only 1% of their stock assets.
Despite the rebound in stocks, the bond market has been unstable, leading to a reevaluation of tariff policies as yields spiked in April.
Consumer sentiment took a hit during the height of tariff proceedings but has recovered somewhat from pre-pandemic lows.
Business sentiment remains unsettled in various polls, with the latest Fed survey indicating widespread concern about uncertainty surrounding policies.
The market is also adapting to new regulations regarding cryptocurrencies, which are now classified as forms of payment rather than assets.
