Forecasts Risks
There are many risks to the forecast, both to the upside and downside. On the upside, the U.S. labor market continues to positively surprise analysts, and tariffs have not yet had the magnitude of expected impact on prices. On the downside, sluggish economic growth from problems in its real estate sector continues to plague China, reducing world demand. There is considerable uncertainty regarding the ultimate levels of tariffs. Tariffs currently are much higher than those produced by the Smoot-Hawley Act of 1930, which is believed to have significantly contributed to the severity of the Great Depression. Higher-than-expected tariffs would lead to yet higher inflation, slower GDP growth, and higher unemployment in the near term. The trade deficit also likely would not decrease, as it is driven by too low savings levels relative to investment in the country. Savings shortfalls particularly occur with ballooning federal budget deficits. The recently passed fiscal policy is forecast to significantly increase budget deficits, further depressing the overall savings level in the nation. During the first Trump administration, the U.S. experienced both rising federal budget deficits and widening trade deficits (Lachman, 2024). Another major area of uncertainty is the prospect of mass deportation of undocumented immigrants. Undocumented immigrants comprise a small but significant part of the U.S. labor force. The departure of immigrants would result in a significant number of job vacancies, leading to upward pressure on wage inflation. This effect would only be partially offset by a decrease in demand linked to the deportation of these individuals.
References
Lachman, Desmond, 2024. “ Will Donald Trump Trigger a Debt and Dollar Crisis?” American Enterprise Institute. November 1, 2024. https://www.aei.org/op-eds/will-donald-trump-trigger-a- debt-and-dollar-crisis/
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