President Trump made a lot of promises on the campaign trail last year. Investors and business leaders enthusiastically cheered some, like lower taxes and relaxed regulation, and expressed wariness about others, like tariffs and reduced immigration.
But when Mr. Trump won the election, there was little sign of that ambivalence: Stock prices soared, as did measures of business optimism.
Investors at the time offered a simple explanation: They believed Mr. Trump, backed by a Republican-controlled Congress, would follow through on the parts of his agenda that they liked and scale back the more disruptive policies like tariffs if financial markets started to get spooked.
It is increasingly clear they were wrong.
In his first weeks in office, Mr. Trump has made tariffs the central focus of his economic policy, promising, and at times imposing, steep penalties on allies as well as adversaries. He has threatened to curb subsidies that businesses had come to rely on. And he has empowered Elon Musk’s efforts to slash the federal bureaucracy, potentially putting tens of thousands of federal workers out of jobs and cutting off billions of dollars in government grants and contracts.
Most surprising, at least to the optimists on Wall Street: Mr. Trump has so far been undeterred by signs of cracks in the economy or by plunging stock prices.
“The idea that the administration is going to be held back by a self-imposed market constraint should be discounted,” said Joe Brusuelas, chief economist at the accounting firm RSM.
Sure enough, on Tuesday, as financial markets seemed to be settling down after days of steep losses, Mr. Trump hit them with another shock, escalating his trade war with Canada. Major stock indexes immediately fell sharply on the news, though they rebounded later in the day.
Far from being deterred by warnings that his policies are creating economic damage, Mr. Trump in recent days has embraced it, telling a Fox News interviewer on Sunday that the economic turmoil reflected a necessary “period of transition” and refusing to rule out a recession.
Other members of his administration have echoed that message, describing tariff-induced price increases and cuts in government spending as a harsh but necessary medicine to restore the economy to health.
Scott Bessent, the Treasury secretary, told CNBC last week that the economy needed a “detox period” after becoming “addicted to this government spending.”
Karoline Leavitt, the White House press secretary, said on Tuesday that “we are in a period of economic transition,” which would result in “a golden age of American manufacturing.”
She downplayed the stock market reaction, calling it “a snapshot of a moment in time.”
“Look, the president is unwavering in his commitment to restore American manufacturing and global dominance and I think he doubled down on that with his new statement” on Canada’s tariffs, she said.
Most economists, however, dismiss the idea that the economy was in need of such shock therapy, or that Mr. Trump’s policies would be helpful if it did.
“It’s an effort to give the pain and the uncertainty that we’re going through at the moment some broader meaning and encourage us that we’re going to get to a better place,” said Nathan Sheets, a former Treasury official who is now global chief economist at Citigroup, of the administration’s new message. “But the bigger question is, are we really going to get to a better place?”
The answer, according to Mr. Sheets and others, is “no.” Tariffs are likely to drive up prices and slow down growth. Tighter immigration policy could do the same. Government layoffs could drive up unemployment, while cuts to federal investments in research and development could leave the U.S. economy less productive in the long term.
“It seems we are going to create pain, see what doesn’t heal, and then treat the injury,” said Tara Sinclair, an economist at George Washington University.
A ‘shock factor’ for businesses
Economists disagree about just how much damage the new administration’s policies have done. The economy entered the year with significant momentum, and most forecasters still believe there is enough of a cushion to avoid a recession, at least if Mr. Trump doesn’t further escalate his trade wars.
But the uncertainty of the past six weeks has been enough to cloud what had until recently looked like a sunny economic outlook. In surveys, consumers say they have become less optimistic about their finances and more worried about higher prices. Businesses, too, have become less confident and are delaying investment decisions.
“There is a shock factor in the business community that we are seeing right now,” said Thomas Simons, chief U.S. economist at the investment banking firm Jefferies. Businesses are slowing hiring and putting off buying products and equipment, Mr. Simons said. “It certainly seems like right now, you’d want to take a breath and let some of the dust settle before you make that decision.”
Cautioning short-term pain
The idea that Americans must endure short-term pain for long-term gain is not entirely new for Mr. Trump. In his first term, he praised farmers who were the collateral damage in his trade war with China, describing them as “patriots” making a sacrifice for the greater good.
But Mr. Trump, in his first term, also tried to offset that damage with billions of dollars in aid for farmers.
This time, the costs associated with Mr. Trump’s policies are potentially much broader, and they are coming in a much different economic context, when Americans have been scarred by years of high prices and elevated borrowing costs.
Consumer surveys show that Americans have begun to anticipate higher prices as a result of tariffs. That could pose a political problem for Mr. Trump, and also an economic one: If consumers come to expect faster inflation, it could make it more difficult for policymakers at the Federal Reserve to counteract a slowdown in the economy through lower interest rates.
Some Fed officials are expressing concern that the combination of slowing growth and stubborn price pressures could put the central bank in a bind.
“That’s a stagflationary impulse,” Austan D. Goolsbee, president of the Federal Reserve Bank of Chicago, said in an interview last week. “There isn’t a generic answer to what you’re supposed to do.”
Mr. Bessent and other members of the Trump administration have argued that the economy they inherited was not as strong as it appeared. In a speech in Washington last month, he argued that growth was being effectively propped up by government spending, and that the economy needed to be weaned off that support.
“The previous administration’s overreliance on excessive government spending and overbearing regulation left us with an economy that may have exhibited some reasonable metrics but ultimately was brittle underneath, and heading for an unstable equilibrium” he said, according to Reuters.
But Jared Bernstein, who served as chairman of former President Joseph R. Biden Jr.’s Council of Economic Advisers, said Mr. Bessent and other members of the Trump administration were simply looking for someone to blame now that economic data has begun to worsen.
“They inherited an economy that was and remains the strongest among all the advanced economies, and they squandered their inheritance in a mere six weeks with policy chaos that’s tanking business and consumer confidence along with markets,” Mr. Bernstein said.
Government statistics support the notion that the economy was solid when Mr. Trump took office, even excluding the role of government. Government spending played a key role in propping up the economy during the Covid pandemic, both at the end of Mr. Trump’s first term and early in the Biden administration. But it fell later in Mr. Biden’s term, while private-sector hiring, investment and spending remained healthy.
