Calculated Risk: Economic Tailwinds and Headwinds

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3 months ago

by Calculated Risk on 4/01/2025 01:50:00 PM

After the election in November 2016, I pointed out that the economy was solid, that there were significant economic tailwinds and that it was unlikely that Mr. Trump would do everything he said during the campaign. See: The Future is still Bright! and The Cupboard is Full.

I was pretty optimistic on the economic outlook!

By early 2019, I was becoming more concerned: “So far Mr. Trump has had a limited negative impact on the economy. … Fortunately the cupboard was full when Trump took office, and luckily there hasn’t been a significant crisis” (emphasis added).

Unfortunately, the COVID crisis struck in early 2020 and Trump performed poorly.

Once again, the economy was in good shape at the start of Mr. Trump’s 2nd term in 2025. Just after the election, Fed Chair Powell said, “The recent performance of our economy has been remarkably good, by far the best of any major economy in the world.” And in December, Powell said the US economy is the “envy of other large economies around the world”.

In his 2nd term, Mr. Trump is being more aggressive with his economic plans. At the same time, he is not benefiting from the tailwinds I described in 2016.

For example, in 2016, I was positive on housing starts and new home sales.

Click on graph for larger image.

The first graph shows single and multi-family housing starts since 2000.

The black arrows point to the start of Mr. Trump’s terms in 2017 and 2025. In early 2017 I was projecting further increases in housing starts. Now I think housing starts will be down year-over-year and move more sideways over the next few years.

Also, in 2016, demographics were improving, and the largest cohort in US history was moving into their peak earning years. Now, demographics are more neutral, and possibly even negative if legal immigration is limited.

The key tailwinds at the start of Mr. Trump’s 1st term and now more neutral and even negative.

And there are additional self-induced headwinds. The tariffs are clearly negative for economic growth. Goldman Sachs economists recently noted:

Reflecting both the tariff news and a decline in our Q1 GDP tracking estimate to just 0.2%, we have also lowered our 2025 GDP growth forecast by 0.5pp to 1.0% on a Q4/Q4 basis (and by 0.4pp to 1.5% on an annual average basis).

And – because of the rhetoric of the Trump administration (suggesting Canada should be the 51st state and the VP saying Denmark isn’t a good ally (completely false and offensive) – there will be less international tourism to the US, and there is a growing international boycott of US goods.

Of course, I don’t expect any progress over the next four years on key long-term economic issues like climate change and income / wealth inequality (that will likely get worse).

The US economy is resistant to policy mistakes, and I’m still not currently on recession watch. However, I’m not sanguine.

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