On Jan. 20, 2025, Donald Trump will officially take the helm as 47th President of the United States. Projections for the way his next term will impact the economy have divided stakeholders and shaken nerves.
A pre-election survey conducted by Nationwide Investment Services found that 34% of investors believed the country would experience a recession within 12 months if their preferred candidate lost.
Economists and academics are already debating the outcome of Trump’s policies. If a recession does come to pass, Americans would face stagnating or declining incomes, fewer jobs and a higher cost of living.
If Trump’s policies have the opposite effect, however, economic expansion would create opportunities for businesses and consumers.
The Elements of Trump’s Economic Plan
Although the Trump administration’s economic plan is still evolving, the basic components were outlined during his presidential campaign.
For example, he said he will extend and expand tax cuts, including reducing the corporate tax rate from 21% to 15% for companies that manufacture goods domestically.
Consumers will enjoy a tax exemption on tips and Social Security benefits, he said. Families would also have access to an expanded child tax credit, which is currently $2,000 per qualifying child, but Trump said he wouldincrease to $5,000.
[Read: What Is the Child Tax Credit?]
To spark U.S. production, Trump said he would increase tariffs on imported goods significantly, including a proposed 60% on Chinese imports.
Meanwhile, regulations in key sectors like manufacturing and energy will be loosened. By expediting environmental approvals and doubling electricity capacity, Trump aims to slash energy prices within the first year of his presidency, a decision that could lower inflation.
During his campaign, Trump also promised to deport undocumented immigrants, which could result in difficult-to-fill potential job openings.
How Trump’s Plan Could Prompt a Recession
Certainly no one wants a recession, which is generally defined as two consecutive quarters of decline in gross domestic product. As GDP shrinks, unemployment rises and businesses may have to lay off employees or shut down entirely.
“In real terms, it means more families will struggle,” says Tyler Schipper, associate professor of economics at the University of St. Thomas in St. Paul, Minnesota. “With declining incomes they won’t be able to afford things like groceries and child care.”
[Read: How to Save Money When Grocery Shopping on a Budget]
Schipper feels the probability of a recession occurring in 2025 is less than 50%, but the year still looks worrisome. Due to implementation lag, it takes time for the impact of policies to show up in the real economy, so it’s a wait-and-see situation.
“Forecasting recessions, particularly over an entire administration, is always a fraught undertaking,” Schipper says.
“Entering a Trump administration, the economy is solid but facing a weakening labor market. Today’s consumer price index suggests the Fed may not be able to cut interest rates as fast as they had hoped,” he adds.
Trump’s restrictive immigration policies may not be entirely offset by proposed tax cuts, either. While he has focused on deportations and stemming illegal immigration, curtailing legal immigration is also on the table, an indicator that the new administration may not be as pro-growth as many hoped.
LendingTree’s senior economist Jacob Channel asserts that if Trump were to implement the policies he discussed on the campaign trail, a serious recession is almost certainly on the horizon.
“It may not happen overnight, but a combination of tariffs, mass deportations and tax breaks are likely to result in an economy where prices are rising, businesses are struggling to keep afloat, and where the government is less equipped to intervene and provide stability,” Channel says.
Increasing tariffs also increases the costs of imported goods, which Americans regularly purchase and use, like cars, computers, appliances and smartphones. If U.S. firms will pay more to produce the products, those costs will probably be passed to consumers in the form of higher prices.
“In the long run, tariffs may encourage companies to produce more products domestically, but such a shift will take time and cost money,” Channel says.
“At the moment, however, the U.S. simply lacks the infrastructure necessary to move all foreign production into the country. Businesses would struggle to find factories that can accommodate their needs, just as they would have issues finding enough workers to keep up with their current production schedules,” he adds.
Why Trump’s Plan May Lead to Economic Growth
Matias Vernengo, professor of economics at Bucknell University, believes a recession is very unlikely.
“We avoided a recession even when the Fed was hiking the interest rate,” Vernengo says. “That could have had a significant impact on the housing market and on consumption. Now the Fed has been reducing interest rates, and basically signaled it will continue to do so.”
Lower interest rates are positive for consumers, since it makes loans and other credit products cheaper. It expands purchasing power and leaves more money available for savings, investments and debt repayment.
According to Vernengo, there is no reason to think that Trump will significantly cut spending, despite potential reductions in social safety net programs like Medicaid and SNAP (food stamps).
[Read: What Are Food Stamps and How Do I Access Them?]
“There will be continuing growth, perhaps at a more moderate pace,” Vernengo says.
“There might be some snags in the labor market and scarcity of workers in some sectors like agriculture and construction if his anti-immigration policies are too harsh, but I suspect he will stop short of causing issues with the economy,” he adds.
Vernengo believes that fears of inflation brought on by the increase in tariffs are exaggerated. “Historically, higher tariffs go hand-in-hand with deflation,” he says.
[Related:How to Prepare for Deflation]
Ultimately, it’s too early to accurately predict what will really happen, but there is reason for a positive outlook, says Usha Haley, W. Frank Barton distinguished chair in international business at Wichita State University.
“I do see reduced growth in the short term brought about by policies such as very high tariffs, but not a recession,” Haley says.
“I think the biggest deterrent to robust growth is the uncertainty surrounding the new administration’s policies. Companies need details or at least a general direction to formulate plans, and so far this has not been forthcoming,” she adds.
Furthermore, the biggest deterrent to a recession is that the wheels of government move slowly, Haley says, explaining that legislators’ constituents will likely oppose some of the new administration’s policies.
Plan With Both Possibilities in Mind
The general advice to Americans is to not panic or think the worst is inevitable.
“Take a deep breath and see where the policies fall,” Haley says. “Almost nothing will happen in the next year. We also have the best-performing economy in the world. It’s very complex with a lot of moving parts and in general, things keep moving along.”
If you are concerned that a recession would impact your job, Schipper recommends brushing up your résumé now. Create and strengthen business contacts and be ready to pivot if necessary.
“Prepare for the worst and hope for the best,” Channel says.
“Do your best to save what you can, pay down debts, avoid taking on new unnecessary debts and strengthen your finances as much as possible. At the end of the day, you need to be proactive. Don’t obsess. The future is not written. What you saw on the campaign trail is not what will necessarily happen,” he adds.
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Will Trump’s Policies Spark a Recession? originally appeared on usnews.com
