Concerning economic signals in early 2025
Over Trump’s first two months in office, some aspects of the economic outlook for typical Americans have become clearer, even as policy uncertainty escalates. At the urging of President Trump, Congress approved plans to make deep cuts to Medicaid and food assistance programs to fund tax giveaways for wealthy households. And, over the past few weeks—amid the chaos of federal funding freezes and layoffs—the stock market has become more volatile, directly impacting the savings of millions of American households.
While some of the Trump administration’s policies have yet to go into effect or fully take hold, below are four areas to watch carefully over the coming months.
Tariffs are pushing prices up
Consumers’ inflation expectations are trending up, as revealed by February data from the University of Michigan’s Surveys of Consumers. Trump’s calls for higher tariffs and mass deportation of immigrants created early inflationary pressures. In anticipation of the Trump administration’s actions, firms built up inventory of imported items and consumers accelerated discretionary purchases, such as home renovations and new or used cars.
The Trump administration’s tariffs on Mexico and Canada are expected to put upward pressure on prices and sticky inflation. The 25 percent taxes on goods coming from the United States’ biggest trade partners will raise costs for American businesses and households. Production costs will rise as firms pay more for energy, agricultural products, and intermediate goods such as car parts.
American consumers pay for higher tariffs—not foreign countries, as Trump has claimed. Indeed, the Federal Reserve’s Federal Open Market Committee—which makes interest rate decisions—observed in January that “firms would attempt to pass on to consumers higher input costs arising from potential tariffs.” Some major retail chains have already said they are poised to hike prices, passing on all or some of these higher costs to American consumers.
Economic forecasters are also predicting higher inflation because of Trump’s new tariffs. In an early February investor note, J.P. Morgan said its strategists expected inflation to increase by 0.5 to 1 percentage point and GDP growth to decrease—also by 0.5 to 1 percentage point—if Trump’s “tariffs on Mexico and Canada are imposed for a prolonged period of time.” Others have projected tariff-linked price increases for this year in the same range. The Budget Lab at Yale estimates that tariffs will cause prices to rise “by 1.0-1.2 [percent], the equivalent of an average per household consumer loss of $1,600–2,000 in 2024.” Goldman Sachs estimates that 25 percent tariffs on Mexico and Canada will drive inflation up by more than 1 percentage point. In addition, the Royal Bank of Canada predicts a 0.5 percentage point increase in the U.S. inflation rate by year end.
The added inflation could slow U.S. economic growth. Tariff-driven inflation will directly hit people’s wallets as they pay more for everything, including food, cars, and fuel. Higher prices for necessities will squeeze households’ budgets for other goods and services. Higher inflation could also complicate the Fed’s plans to lower interest rates, where lower rates would spur greater business investment and ease home purchases. In addition, many U.S. producers will face supply pressure in the form of higher import tariffs as well as demand challenges, as their export markets become more challenging in the face of expected retaliatory tariffs.
Consumer confidence is falling
The Conference Board’s U.S. Consumer Confidence measure—a prominent indicator of consumers’ outlook for the economy—dropped “sharply” in February, falling “below the threshold of 80 that usually signals a recession ahead.” Conference Board senior economist Stephanie Guichard noted that “comments on the current Administration and its policies dominated the responses” in the survey.
Consumer confidence is not just about vibes, to use recent vernacular. Consumer confidence has fallen substantially in 2025. The University of Michigan’s index of consumer sentiment stood at 64.7 in February 2025, the lowest reading of the composite index since November 2023. Consumer sentiment dropped 12.6 percent from December 2024—the index’s last peak—to February 2025, largely driven by consumer expectations of tariff-induced price increases.
When people see their future economic prospects dimming, they are less likely to spend money on big-ticket items, such as cars. The drop in durable goods spending in January may be a harbinger of things to come. In January, inflation-adjusted consumer spending dropped by an annualized rate of 0.5 percent. This was the largest decline since February 2021. The reductions in consumer spending were especially large for cars (-6.0 percent) and recreational goods and vehicles (-2.9 percent), such as tennis rackets and bicycles. While one month does not necessarily make a trend, the falloff for durable goods spending may signal that people are pulling back on large purchases amid widespread uncertainty about where the economy is heading.
The labor market is softening
The U.S. economy added 151,000 jobs in February, marking the 50th consecutive month of job growth. While the overall unemployment rate remains low by historical standards—at 4.1 percent—it increased for white men; for workers without a high school diploma; and for those with a college degree. The number of people who worked part time because their hours were reduced or they were unable to find full-time work jumped by 460,000 in February. These data points were consistent with other signals of a weakening labor market with less favorable conditions for workers. For example, the labor-leverage ratio—a measure of quits to layoffs and an indicator of workers’ ability to secure better jobs—has been trending down.
The Trump administration’s layoffs and attempted buyout of federal workers would add to the pool of people searching for work. A reported 75,000 federal workers accepted the Trump administration’s buyout offer, which is being challenged in courts. Thousands of federal workers have been laid off, including cancer researchers; National Park Service rangers; and military veterans. DOGE’s actions are being felt across the country—the vast majority (80 percent) of the federal workforce is outside the Washington, D.C., area—and employment repercussions extend to private sector contractors. While it is still too early for the full effect of federal layoffs to show up in employment data, unemployment claims rose nationally and were up sharply in the District of Columbia in late February.
The Trump administration has not yet adopted major policies to boost jobs and real wage growth. On the contrary, Trump said he wanted to “get rid of” the CHIPS and Science Act of 2022, and his administration halted funding for projects stemming from the Infrastructure Investment of Jobs Act of 2021 and the Inflation Reduction Act of 2022. Those laws have spurred investment and are creating jobs in states such as Texas, Arizona, Michigan, and Georgia.
Volatile policy could chill investment
A volatile policy landscape can be a harsh climate for business, making it difficult for companies to forecast returns on investment and assume contracts will be fulfilled. Such uncertainty has increased since Trump was elected in November 2024. As one measure, the Economic Policy Uncertainty Index stood at 234 in February 2025, its highest reading since December 2020. This newly, highly unstable and uncertain policy environment is bad for business. Periods with above average increases in policy uncertainty have also been associated with slower industrial production growth—a reflection of less investment and other economic activity.
All eyes are on growth forecasts. At the end of February, the Atlanta Fed’s GDPNow forecast for the first quarter of 2025 dropped to -2.4 percent, flipping from projected growth to contraction. One interpretation is that Trump’s preinauguration bluster on tariffs appears to have pulled forward imports, demand for discretionary purchases, and production in anticipation of higher prices. Future months’ data will reveal whether the downturn represents a correction, an overstatement, or real longer-run trend.
Small businesses, farmers, and other government contractors can no longer rely on steady revenue from federal programs or trust that the government will be a trustworthy economic partner. The Trump administration’s sudden cancellation of federal contracts has added to the uncertainty. Many farmers are not receiving payment as expected from existing contracts with the U.S. government. Numerous small businesses across the country expect to take hits, and large ones do, too: 2 percent of United Airlines’ business is government travel. At the same time, there is also uncertainty about staffing at public agencies after some critical government employees were fired only to be asked to return to maintain essential services, such as fighting the spread of bird flu or maintaining proper oversight of U.S. nuclear weapons.
Another emerging problematic pattern is the Trump administration’s threats to cancel federal contracts in order to potentially award them to companies in which Elon Musk—already the world’s richest person—has a financial stake. For example, the Federal Aviation Administration is reportedly exploring terminating its $2.4 billion contract with Verizon in favor of Starlink, and the Commerce Department is reportedly considering changes to broadband funding stacked in Starlink’s favor.
Trump is slashing the safety net and consumer protection for Americans’ savings
Worryingly, whenever the U.S. economy next enters recession, the Trump administration’s agenda may have pulled the social safety net out from under Americans. The budget instructions passed by the House of Representatives last month—what Trump dubbed one “big, beautiful bill”—would cut Medicaid by at least $880 billion and the Supplemental Nutrition Assistance Program (SNAP) by at least $230 billion. Those programs are designed to give Americans stability by providing health coverage and food assistance, including during economic downturns.
At the same time, the Trump administration is on a path to increase the costs for consumers. Under Trump’s watch, DOGE has slashed resources for agencies tasked with safeguarding Americans’ savings and ensuring that banks, credit card companies, and other financial service providers do not scam or deceive working families. Trump and DOGE aim to unlawfully wind down the Consumer Financial Protection Bureau—an agency whose efforts returned $21 billion, taken illegally or unfairly, back to consumers. And 670 employees were fired or resigned from the Federal Deposit Insurance Corporation, which oversees banks and guarantees Americans’ hard-earned deposits. As a result, Americans will likely end up paying higher fees for financial services—all without the peace of mind that their life savings are secure.
Conclusion
To reverse these concerning economic trends, President Trump and Elon Musk’s DOGE would need to cease all haphazard, harmful, and unlawful cuts to government employment and programs. Congress should heed the signals of economic volatility by protecting the social safety net rather than gutting it to fund tax cuts for the richest Americans.
Acknowledgements
The authors thank Natalie Baker, Kyle Ross, Ryan Mulholland, Ben Olinsky, Michael Sozan, Shannon Baker-Branstetter, Colin Seeberger, and Sean Casey for valuable input and Mimla Wardak and Kennedy Andara for research assistance.