The economic policy changes of President Donald Trump are increasing uncertainty in the U.S. economy. There are even concerns that ‘stagflation,’ in which recession and inflation occur together, may strike.
The New York Times (NYT) reported that federal government spending cuts, layoffs of public servants, and the imposition of tariffs on major trading partners are shaking corporate and consumer confidence. In particular, the federal government's budget freeze is dampening consumer sentiment and affecting corporations' investment plans. Some local governments are considering tax increases or issuing local government bonds to balance their budgets, which, if implemented, is expected to increase the economic burden on citizens.
President Trump acknowledged that his policies could cause some pain in the initial stages but argued they would help economic growth in the long run. However, economic experts warn that more serious warning signs are emerging. Michael Strain, an economist at the conservative think tank American Enterprise Institute (AEI), noted, 'The uncertainty is much greater than the market is thinking right now,' adding that 'the uncertainty in trade policy and various measures pushed by the government efficiency department are continuously stifling investment and business expansion plans.'
Some economic indicators already show that this uncertainty is affecting the real economy. Recently, the Conference Board's consumer confidence index fell by the largest margin since 2021, and key indicators measuring corporate activity are also showing signs of slowdown. In particular, the construction industry and housing market are facing significantly dampened investment sentiment due to concerns over tariffs and high interest rates. The U.S. corporate activity index announced by S&P Global also reported a slowdown in growth in February, affected by federal expenditure cuts and tariff policies.
The phenomenon of short-term interest rates surpassing long-term rates, which has appeared each time the U.S. economy has entered a recession, is also heightening concerns about the economy. As of the 26th, the yield on 10-year U.S. government bonds was 4.256%, down 0.04% from the previous day, causing an inversion of the long and short-term bond yields. Generally, the yield on 10-year government bonds should reflect expectations for long-term investments and be higher than that of 3-month government bonds, but the opposite is currently occurring. This suggests that investors are concerned about a short-term economic downturn.
The labor market is also under threat. NYT reported, 'While the U.S. unemployment rate remains around 4%, the government efficiency department has already begun to cut thousands of jobs,' adding that 'this is still in its early stages, and further reductions are expected depending on how well cost-cutting policies align with President Trump’s administration agenda.'
During a cabinet meeting on the 26th, President Trump dismissed concerns about the negative impacts of economic policies by saying, 'Public confidence has recorded the largest increase rate in history.' However, experts continue to warn that Trump's economic policies could pose unforeseen risks to the U.S. economy. Economists at Morgan Stanley analyzed that Trump's tariff policies could reduce personal consumption expenditures by as much as 2% and increase inflation by 0.6 percentage points. They also warned that the real economic growth rate could decline by as much as 1.1 percentage points.
Despite the uncertainty surrounding tariff policies shaking the U.S. economy, President Trump is pressing ahead with existing plans. On the 27th, Trump stated that if the drug problems entering the U.S. are not resolved or significantly improved, he would impose a 25% tariff on Canada and Mexico starting March 4. He also announced that he would impose an additional 10-percentage point tariff on China.
Earlier, on the 1st, President Trump signed an executive order imposing a 25% tariff on imports from Canada and Mexico and a 10% tariff on imports from China. This measure was originally scheduled to take effect on the 4th, but President Trump had previously postponed the tariffs for a month, citing an agreement from Canada and Mexico to strengthen border enforcement. Furthermore, Trump stated that 'a 25% tariff will be imposed on all automobiles and everything imported from the European Union (EU).'