Consumers, businesses, and financial markets are searching for clarity on multiple initiatives of the Trump administration and their ultimate economic impacts
Markets do not appear to be pricing yet for broad universal tariffs, which are generally expected to have a more negative economic impact than transactional tariffs as a negotiation tactic
The House budget “blueprint” presents risks to consumer credit of lower income borrowers if government transfer payments are significantly reduced
The early days of the second Trump administration have been anything but quiet. A flurry of executive orders, the blunt approach to improving government efficiency (DOGE), continued threats of broad universal tariffs, and geopolitical tensions have all created much noise for market participants to navigate and interpret.
Beginning with tariffs, the base-case assumption for financial markets has been that these levies will primarily be used as a threat to achieve some other policy goal (e.g., border security), but events of the last several days have raised speculation of a broader objective. If the goal of tariffs is raising federal revenues and making domestic goods more competitive, universal tariffs are likely necessary, which could come with much greater inflation and growth implications. If tariffs are more targeted against certain countries (China) as we saw in the first Trump administration, it is easier for U.S. companies to achieve import substitution, that is, sourcing similar products from other countries with lower/no tariffs. If universal tariffs become more likely, financial markets are likely to reprice in anticipation of impacts on inflation, consumption, and U.S. corporate profit margins. Tariffs are a tax that must be absorbed by some mix of U.S. consumers and businesses.
Recent surveys of both individuals and businesses showed weaker sentiment, with tariff uncertainty mentioned for both as a notable concern. The S&P PMI report for February showed activity in the services sector contracting for the first time in two years, and after rising in the wake of the election, expectations for future activity fell to the lowest level since September, with respondents citing concerns surrounding tariffs, higher prices, and geopolitical risks. That same day, the February University of Michigan consumer survey showed long-term inflation expectations rising to the highest level since the peak of the Covid inflation surge, something not likely to be overlooked by Fed policymakers.
Exhibit 1
Regarding consumer confidence surveys, there is an inherent political bias to responses, as illustrated in Exhibit 1. The University of Michigan survey asks respondents their political affiliation, and as illustrated in the chart, there was a big swing in economic expectations between Democrat and Republican respondents before and after the election. However, all three categories moved lower in January. While bias may exist, perception can influence behavior, which is why market participants, economists, and Fed policymakers pay attention to such metrics.
DOGE & Budget Negotiations
There has been much media attention on Elon Musk and his DOGE team related to staff reduction at most federal agencies. A natural question emerging is what will ultimately be the projected economic impact of these cuts? The short answer is it’s too early to tell and will depend on the ultimate scale and timing of any firings. According to Bureau of Labor Statistics data, there were 2.42 million civilian federal jobs as of January 2025, excluding postal workers. For perspective, total nonfarm payrolls totaled 159 million in January.
Despite the private sector being significantly larger, substantial federal firings could still have an economic impact, but the timing also matters (i.e., over what timeframe are these cuts carried out?). There’s also the question of the budget impact. According to research by Santander economist Stephen Stanley, total compensation for federal employees, including benefits, averages over $150,000 per year. For 2.42 million federal workers, this totals more than $350 billion per year. If the federal workforce was reduced by 10%, that would be less than $40 billion in annual savings relative an annual budget deficit of approximately $2 trillion, or less than 2% of the annual deficit. Again, the ultimate impact will depend on the scale and timing of the cutbacks.
In late February, House Republicans passed a budget “blueprint” that laid out the broad strokes for the Trump administration’s fiscal plans. It includes a renewal of the 2017 tax cuts and new spending totaling $4.8 trillion over the next decade offset by $2 trillion in spending/program cuts. Programs expected to be cut include Medicaid, food stamps, subsidized school lunches, early childhood educations programs, and student lending, all of which have a greater impact on the lower end of the income spectrum. As it relates to financial markets and lending, this could create additional stress for consumer credit of near/subprime borrowers, including auto loans, credit cards, and unsecured loans. As illustrated in Exhibit 2, auto delinquencies for those with credit scores below 680 (at origination) have been climbing for the last 2-3 years, and a reduction in government transfer payments could further affect their ability to repay.
Exhibit 2
As in any budget negotiations, the final bill might not look much like the House blueprint. Projected revenues from tariffs could be used in the negotiations, and the Senate version of the legislation may include less cuts to social spending programs. The debt ceiling is also a hurdle in the coming month, but the government should be able to fund itself through extraordinary measures into the summer months.
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