Trump’s budget bill will affect all aspects of the economy
The budget bill passed and signed the law touches on the lives of all Americans in one way or another. Will you get better or worse?
President Donald Trump’s aggressive economic policies are likely to slow US growth significantly and boost inflation, but it will not cease to cause a recession or “stagflation” – a disastrous scenario imagined by predictors before he took office.
“We won’t let the whole policy out of the economy go, but we’ll significantly reduce growth during Trump’s four-year term,” said Justin Begley, an economist at Moody’s analysis.
He added, “It’s not stagflation yet, but it borders like that.”
Stagflation is an economy characterized by high inflation, slow or stagnant growth, and high unemployment. This is a rare and toxic cocktail. Typically, slowing the economy leads to lower inflation, allowing the Federal Reserve to cut interest rates and stimulate more borrowing and activity.
Will the Fed have a lower fee in September?
However, the Fed faces a dilemma as it could further promote inflation to lower the rate to strengthen the softened labor market. The rise in consumer prices has generally been significantly eased after pandemic-related spikes, but has recently been higher due to Trump’s drastic import tax.
His policies impose countervailing forces on the economy. Tax cuts and increased spending on border security and defense are set in juice growth. But these positive catalysts are expected to be more than offset by tariffs, historic immigration crackdowns, layoffs for hundreds of thousands of federal workers, and massive cuts in social service programs such as Medicaid and food stamps, Begley said.
In Trump’s presidential election with former Vice President Kamala Harris last year, Moody predicted that Trump’s economic blueprint would cause a recession by mid-2025, among other research companies. The Moody’s have updated some of the predictions as the outline of his plans have recently been more clearly defined, Begley said.
“We see better where things are going,” he said.
What kind of tariffs did Trump impose?
For example, steel and aluminum, foreign cars, and Chinese imports have double digits of high tariffs in place. The White House then reached deals with trading partners, including Japan, South Korea, Vietnam and the UK, with tariffs set at 10% to 20%.
Trump’s deportation and restrictions on the southern border intersection are on track. And his huge budget bill, which he signed into law on July 4th, expanded tax cuts in 2017, strengthened military and border security spending and reduced eligibility spending.
How is the economy doing under Trump?
Moody’s Project Trump policy said it would cut an average of 0.4 percent points (almost half points) per year during his term. This will increase the economy by an average annual increase of 1.7% over four years, growing at 1.4% next year, reaching 2.2% in 2028.
The economy grew at an annual rate of 1.2% in the first half of 2025, according to an economist surveyed by the Wolters Kluwer Blue Chip Economic Indicator.
In contrast, the economy grew by an average of 2.3%, 3.5% during former President Joe Biden’s term, ten years after the Great Recession of 2007-2009. However, the latter included unusually strong benefits as the country was born out of the pandemic recession. In 2024, Biden took office last year, making the economy 2.8% healthy.
No matter who wins the 2024 election, growth was expected to downshift as consumer demand was curbed and Americans dried up government pandemic aid and other government stimulus packages.
But by the end of Trump’s term in 2028, the economy will be 1.3% smaller than if his policies had not been enacted, Begley wrote in the report. The unemployment rate is also expected to peak at 4.7% in 2027, then falling to 4.4% by the time Trump takes office. Without his policy, the unemployment rate would be significantly stable at around 4%, with around 885,000 additional jobs, Moody said.
Will inflation be reduced?
Similarly, Trump’s policies are poised to boost inflation at half the average annual rate. This leaves an average annual inflation of 2.6% during Trump’s term, peaking at 3.1% in 2026. Inflation will decline, almost reaching the Fed’s 2% target in 2028, the final year of his term.
Without the president’s policies, inflation would achieve the Fed’s goals next year, Begley’s analysis shows.
Do tariffs contribute to inflation?
Tariffs represent both the greatest resistance to growth and the biggest contributor to inflation, Begley said. Companies are expected to give consumers a large portion of their obligation costs and raise prices. And it is expected to take away their purchasing power and reduce consumption, which accounts for 70% of economic activity.
Without tariffs, Begley said the net impact of Trump’s policy on growth was slightly positive. The benefits of tax cuts and increased defense and border spending will outweigh the casualties of immigrant crackdowns, federal layoffs and cuts in Medicaid and food stamps, he said.
What are the negative effects of deportation?
Another huge hit comes from deportation.
Like tariffs, immigration crackdowns are projected both in reducing growth and promoting inflation. A decline in workers’ supply in industries such as construction, agriculture and hospitality is expected to raise wages and prices. And the low immigrant population means lower consumer spending.
Here’s why Moody’s predictions about the impact of Trump’s policies are less dire than before he took office:
Less retaliation from tariffs
Trump’s tariffs are higher than expected, but Moody was expected to see more significant foreign retaliation that would hit the exports of US manufacturers. At least so far, these countries have taken a more restrained approach.
Less deportation than expected
The Moody’s thought the Trump administration would try to deport around 1 million immigrants who lack permanent legal status each year. But Begley said it has proven logistically challenging. Goldman Sachs estimates that monthly deportations average around 600,000 per year.
Tax cuts allow middle class Americans to spend more money
Trump vowed to eliminate hints and taxes on overtime during his campaign, but the Moodys didn’t necessarily expect him to follow. However, the budget bill will scrap taxes on tips up to $25,000 a year, reducing taxes to as many as $12,500 over time.
