Trump’s tariffs whiplash isn’t sustainable long term

Donald Trump concedes his own policy platform comes with an economically damaging ‘transition’ period.

Less than two months after promising a new American “golden age,” Donald Trump is conceding his own policy platform comes with an economically damaging “transition” period and is providing no guarantee against recession.

Markets, businesses and consumers are increasingly alarmed and the country is suffering from tariff “whiplash” – shorthand for the economic uncertainty of having them imposed only to be lifted again through last-minute exemptions and carve-outs. This will only undermine investment confidence and is not a sustainable approach over the long term.

US stocks dropped sharply on Monday, with the S & P 500 falling more than 2.5 per cent and the Nasdaq Composite plunging by 4 per cent in the clearest signs yet that Trump’s on-again, off-again deployment of tariffs is heightening recession fears.

Sweeping steel and aluminium tariffs – including those being imposed on Australia – are scheduled to commence from March 12 followed by reciprocal tariffs from April 2, but there is considerable uncertainty over these measures, given Trump’s tendency to grant last-minute exemptions.

The post-election optimism following Trump’s November win is giving way to fears his policies will saddle the economy with a mix of ad hoc tariffs, higher prices, suppressed demand and slowing growth.

While the US fiscal position was already in a dire state prior to the November election, experts are warning of a further blowout to the country’s deficit with debt as a proportion of GDP forecast to reach new record highs.

The US President also faces an immediate political hurdle with federal funding set to expire on Friday, triggering a confidence-sapping government shutdown that could furlough 800,000 workers and halt key programs while curtailing growth.

To avert a crisis, Congress must pass a stopgap measure or “continuing resolution” in the next four days – a key test of Trump’s ability to unite the GOP, navigate Democratic opposition and maintain support for his longer-term economic agenda.

A failure on this front will only entrench perceptions of chaos in Washington prolonging economic turmoil.

While Trump has promised to deliver the “greatest economy in history,” a yawning gap has emerged between his rhetoric and the economic reality of his platform.

Trump told Fox News on Sunday local time that “we’re going to have growth like you’ve never seen before.” Yet, in the same interview, Trump refused to rule out a recession – an admission that is now rattling US markets.

“I hate to predict things like that,” he said. “There is a period of transition, because what we are doing is very big. We are bringing wealth back to America … It takes a little time.”

The contradictions in Trump’s approach are growing more obvious.

On March 6, the Atlanta Fed’s widely tracked GDPNow model estimate for growth in the first quarter of 2025 stoked fears of a downturn by pointing to a 2.4 per cent contraction – a stunning reversal from its forecast of a 3.9 per cent boost to GDP at the start of February.

The Conference Board’s Consumer Confidence Index declined by 7.0 points in February to 98.3, the largest monthly decline since August 2021, while its Expectations Index dropped 9.3 points to 72.9. This was the first time since June 2024 that it was below the recession-signal threshold of 80, driven by tariff-induced price fears and federal job cuts.

The University of Michigan’s February survey of US consumer sentiment also showed a reading of 64.7 points, down nearly 10 per cent from its January reading of 71.1 points.

Adjusted for inflation, consumer spending dropped 0.5 per cent in January 2025 – the sharpest pull back in nearly four years despite a real increase in disposable personal incomes.

While unemployment is historically low, momentum in the labour market also appears to be slowing.

Executive and outplacement firm Challenger, Gray & Christmas found that US-based employers announced 172,017 job cuts in February, the highest total for the month since 2009, with the trend being led by government amid a crackdown on federal workers by the Department of Government Efficiency (DOGE) crackdown.

One of the key differences between Trump’s rhetoric and the economic reality was on display in his 100-minute address to the US Congress last week when he committed to delivering a balanced budget.

Michael Strain from the American Enterprise Institute told The Australian this pledge came despite the fact Trump was “working with Congress on a budget that would substantially increase the deficit”.

“Trump has been very clear he wants to cut taxes well in excess of any spending cuts that might pass,” Strain said. “The right guess is that the deficit will go up. There is uncertainty about how much it will go up.”

On February 25, the House of Representatives passed a budget resolution for the 2025 fiscal year by a narrow margin of 217 to 215 votes – setting up the framework for the subsequent reconciliation legislation. The terms of this framework would allow for up to $4.5 trillion in deficit increases from tax cuts over the next decade, contingent on achieving $2 trillion in spending cuts.

The resolution would also allow for a $4 trillion increase to the federal debt ceiling, currently pegged at $36.1 trillion, although the new debt limit would likely be reached again by late 2026 to mid-2027. It would also provide for up to $300bn in new spending over the decade, largely to bolster defence and border security.

Republicans argue the economic blueprint will ignite greater economic growth that would offset the costs of tax cuts, but the experts question this.

Trump has not only called for the permanent extension of his 2017 tax cuts but new measures including no taxes on tips, overtime and social security benefits for retirees as well as making auto-loan interest tax deductible on cars manufactured in the US.

The Washington-based Tax Foundation says that extending the 2017 Tax Cuts and Jobs Act would decrease federal tax revenue by $4.5 trillion from 2025 through to 2034. While long-run GDP would be 1.1 per cent higher, it would only offset $710bn or about 16 per cent of the projected revenue losses.

Analysis by the Committee for a Responsible Federal Budget suggests the House budget resolution would add “at least $2.8 trillion to deficits through FY 2034, or $3.4 trillion including interest”.

It finds that public debt would rise to 125 per cent of GDP by 2034 compared with 117 per cent under current settings, while deficits would average 6.8 per cent of GDP over the decade compared to the current average of 5.8 per cent.

Strain said the best way to improve the US budget position would be to start with “reducing expenditures on Medicare and social security. And they’re the two programs he (Trump) has taken off the table”.

“I don’t think it has to be that way,” he said. “It can be done. And it will be done. At the end of the day these programs are going to have to be reformed to get the nation off its unsustainable fiscal trajectory. President Trump and President Biden have completely shut down the conversation.”

Vice President of Federal Tax Policy at the Tax Foundation, Erica York, told The Australian the policies outlined so far by Trump – including permanence for the 2017 tax cuts, additional tax cuts, and higher tariffs – would “increase US budget deficits and debt, while potentially having only a small impact on US output as trade wars would offset some or all the benefit of better tax policy”.

“We estimate the tariffs implemented so far would shrink US GDP by 0.4 per cent, before retaliation, if left in place,” she said. “While the imposed tariffs would raise revenues for the federal government – about $142bn this year before accounting for the negative economic impact – that revenue would come at a high cost to the US economy and would disproportionately burden lower and middle-income households in the US.”

The Federal Reserve has signalled it is carefully assessing the upside risks to inflation arising from the Trump administration’s approach to trade, immigration, fiscal policy and regulation. It kept rates steady in January with annual inflation still running at 3 per cent – well above the Federal Reserve’s 2 per cent target.

The CPI rose 0.5 per cent between December and January, the fastest one-month increase since mid-2023. And, on March 7, Federal Reserve chair Jerome Powell said near-term inflation expectations had increased with consumers and businesses “mentioning tariffs as a driving factor”.