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Welcome to Trumponomics, the podcast that looks at the economic world of Donald Trump, how he's already shaped the global economy, and what on earth is going to happen next. Today we're asking have Donald Trump and Elon Musk stalled the US economy? A week or two ago, the highly influential now cast of the US economy that updates every day was suggesting that the US economy was going to grow at an annual rate of two point three percent in
the first three months of this year. But now a lieu of negative data just in the past week has that measure predicting the economy will shrink by nearly three percent. Now, that's the first time that gauge has turned negative since
twenty twenty two. Now it's just one measure, it's a now cast, It jumps around, But several prominent Wall Street forecasters are also now expecting the US economy to shrink just in those first three months of the year, and investors, amid all the gloom, amid all the worry about tariffs and other things, are betting on three interest rate cuts by the US Central Bank, the FED to support the economy this year, rather more than they were expecting a
while back. So is this all Donald Trump an Elon Musk's fault instead of that Trump bump to the economy that we were talking about at the beginning of the year. Has a combination of layoffs in the federal government, sweeping tariffs, and a whole lot of uncertainty raised the prospect of a Trump slump or is it as the Treasury sectary
Scott bessn't reassured us this week, just a period of transition. Well, to answer that, we felt here at Trumponomics that we had to double down on the number of economists on the show. So we have two pH d economists, both of whom spent time one time or another in the President's Council of Economic Advisors in the recent past. First our guest Catherine Holston, new to the show now at Evercore ASI Research, was a senior economist in the White House last year and before that in the Office of
the chief Economists of the World Bank. Catherine, very good of you to be here.
Thank you so much for having me. It's great to be here.
And our regular in house guest, Anna Wong, chief US economists for Bloomberg Economics and also formerly an economist at the Federal Reserve and at the Council of Economic Advisors in the White House swamps comment during Donald Trump's first time Anna, always good to have you.
Oh, it's good to be here again.
Look, there's two pieces of this, and I told you before we started recording a little bit about having so many super smart economists, though very happy that we're all women, to talk about the impact of tariffs, of the so called Department of Government efficiency, and just generally this mood of gloom that seems to have been starting to descend around the US economy in the last week or so after so much optimism about in the first weeks after
President Trump was reelected. We're going to get into all that, but maybe we could just have a top line view of how you both think these two shocks, the tariff shocks and what's happening to the federal government will affect the economy. Catherine, I know that you are my old friend and your colleague Krishna Guha have looked at both trade policy uncertainty and the impact of Elon Musk's DOGE efforts and how they affect growth this year.
So I'll start on the tariff side, and I'll mention that I'm going to be comparing apples and oranges a little bit in our estimates here, So I just want to flag that. But this tariff scenario with twenty five percent on Canada and Mexico going to twenty percent on China matches the kind of max tariff scenario that we laid out in a recent note. We think this could add fifty basis points to core PCEE inflation in twenty twenty five, another twenty basis points in twenty twenty six.
That's pretty substantially more than our base case in terms of what the FED is looking at. That includes two pieces in this shock here. One is the actual impact of the tariffs, and then second the really big uncertainty that we're seeing trade policy uncertainty, and there's good reason to think that's going to continue to remain quite high, potentially pushing up inflation expectations, which is what the FED is of course worried about on the DOGE side of things.
Within the government, we think the impact in March, April and May could lead to payroll employment growth that is seventy thousand less than expected in a baseline, which is a pretty big hit considering where we're at with payroll growth right now.
We'll get into how that compares with the overall size of the economy. But Anna, I mean just the same question to you, your sort of top line thoughts on this sort of double whammy that we have now coming you know, at very similar time hitting the US economy on the tariffs and the DOGE cuts.
Right, So my top line effect estimates on the direct tariff, not including the uncertainty, or at least what I think the FED will have is quite similar to Catherine's estimate. So I have one point three percent hit on GDP and also zero point eight percent increase on core PCE.
And these are the estimates implied from the general qualiber model that the International Finance Division at the FED use as a dashboard to track coming trade policy in the first Trump administration, and typically the horizon is about two years or two or three years. That's because that's usually
our forecast horizon. So if you take that point eight percent core PCE inflation hit spread over to R three years, with the maximum arriving in the first two years, that's very close to where Catherine has on the uncertainty piece. Though the experience of the First Trade War has taught I think the FED economist that the general equilibrim model the estimate might be a maximum take, because ultimately in the First Trade War, both a GDP estimate and the
core PC estimate actually undershot what the model suggests. The bigger piece is actually uncertainty, and the FED has developed a trade policy uncertainty. Currently, the index of that trade policy uncertainty developed by my former colleagues at a monthly level is eleven standard deviation above historical norms, and it's almost doubled the size of the first Trump administration trade policy uncertainty. So that piece should be translating to a
hit GDP. Hit based on that value should be aboutero point eight percent GDP and on DOGE, So I think that the DOGE cuts so far or very small relative to GDP, so really it doesn't really work in terms of translating to GDP. However, keep in mind that it
is the difference in the fiscal impulse that affects GDP growth. Right, So if the first two quarters of the DOCHE cuts has generated a bigger change a decline in fiscal spending compared to last year, which is the quarter still under Biden, then that rate of change annualized could generate a pretty
large decline in GDP growth. And according to the shock model that Bloomberg Economics has developed, the contour of the GDP growth from DOCHE excitivities should begin to show up in the first and second quarter of this year, and especially peaking in terms of GDP growth in the fourth quarter. However, the impact on payrolls, as Catherine suggested, will be more obvious sooner, and the February payrolls, which we will be receiving this Friday, we expect we won't be seeing much
of that yet. However you'll start to see that in the next month. And also just again the uncertainty alone you talked about the domain gloom economic data we have received.
What is a.
Sign of weakness is the pullback in consumption which we saw in January. Last December it was very strong, but then in January the consumers pulled back, so there's no underlying strength and consumptions just pulling back. And as we see more of this pullback as a retrenchment to the strength last fall, you're going to see more and more impetus on this pressure on GDP growth.
ANA in the sort of educational byways department, just to get our sense around this trade policy uncertainty, and you talk about it being eleven standard deviations from so when you sit roughly meaning when we say that.
In terms of the index, this index goes back to the nineteen sixties and the Fed Economist collected mentions of the trade policy uncertainty or references of trade policy uncertainty in media and social media and all the newspapers, and right now the index has doubled the level of twenty sixteen, which means that uncertainty is through the roof and there's just no historical comparisons. Is nineteen sixty at the level of uncertainty we're facing right now.
And I guess we have been saying that the tariffs that were announced this week are taking US tariffs back to where they were in the forties. Obviously we're still not at the levels of that preceded that era, there were much higher tariffs than the global economy before that, and I guess that's one thing that the President says is we're in some sense going back to some previous eras for that, Anna was mentioning the fed's Trade policy Uncertainty measure, which has become something as a sort of
standard thing that people refer to. But I noted in your recent research with Krishna, you're also thinking about DOGE policy uncertainty and starting to think that that might be almost of the same order of magnitude. So could you just talk us through it, because obviously I suspect you agree that the narrow impact of those federal layoffs is not necessarily going to move the dial that much. But it's this sort of broader ripple effect that's.
Right, and we think it plays out, you know, maybe quite similarly to how adding trade policy uncertainty to our general equilibrium models does. Because the thing that's unique about trade policy uncertainty right now is that it's much larger in level terms, as Anna said, but it's also has
the potential to be very long lasting. And this is really not what you would model if you were seeking efficiency in the model, and so we wanted to think about how the same impact might be coming out of DOGE, and specifically how the uncertainty for private sector firms that are heavily exposed to federal contracts and grants might weigh on decisions to hire or potentially even do layoffs at these firms. So there's three pieces that we look at here.
The first, as you mentioned, is the direct impact of firing probationary employees and other employees in the federal government, and that's relatively small given the number of workers that we have in the US. There are two point four million federal civilian employees. We don't know how many federal contractors there are, but some estimates from Brookings suggest there are more than five million, more than a two to one ratio between federal contractors and federal employees, and another
two point four million employees potentially connected to grants. So what we do is we look at first our baseline for direct impacts on federal payrolls. This year, I think there could be two hundred thousand federal workers fired over the year. That includes the seventy five thousand who have taken the deferred resignation scheme. But we also look at two impacts on private sector payrolls. The first is really just the direct impact for if there are substantial cuts
to federal contracts and grants. So we're not seeing that yet on a large scale, but if that plays out, we think it's reasonable to assume that firms are not going to be able to hold onto all of their employees as these contracts and grants are cut. The piece that we're calling DOGE policy uncertainty or DPU, and here I would just say TPU trade policy uncertainty. This is something that's measured that we have an index going back
really far. DPU we're putting forward as a proof of concept for just another form of uncertainty that's really unknown how this will operate. And so this is not meant to be precise estimates, but just to say, if we make what we think are pretty modest reasonable assumptions, can we see this having big impacts in the private sector.
And the answer that we get is yes. So we first construct what we call employment at risk in the private sector, and so this is just if at the industry level, industries are receiving federal contracts, just look at that relative to the share of output in those industries and then look at how many employees we think might be supported by these contracts. And then once we have that, we can say, maybe, let's assume five percent of these employees at risk are not maintained in payroll growth because
of this DOGE policy uncertainty. We want to think about two kind of distinct scenarios around the uncertainty. The first is uncertainty lasts for maybe three months. We can think of this as a case where if you're a federal contractor maybe you can maintain your current employees, you institute a hiring freeze, leading payroll growth to be lower than
last year. And in this scenario, we might have uncertainty resolving when DOGE kind of finishes whatever it's choosing to do in a few months, and we might see some catchup hiring over the rest of the year as these firms go back and bring on workers. So in this case, we see some larger impacts in March, April, and May, but we then because of this catchup hiring in our baseline, only see about fifty thousand fewer payroll over the year coming out of this effect, which is really not very large.
But then we look at another scenario where we still have a relatively low magnitude of uncertainty, but it drags out over the remainder of twenty twenty five, and in that case, we can get something like three hundred and thirty thousand fewer payrolls over the year just from this DPU effect, just by assuming that maybe initially firms are hiring less, but then over time they're actually having to go through with layof and the continued weight of this
uncertainty induces kind of a paralysis effect on these firms that are pretty heavily exposed to federal contracts in grants.
It's interesting, just while we're recording this, which is on a Tuesday afternoon, the S and P five hundred has lost all the gains that it made since Donald Trump was elected in November. We've had something like three point four trillion dollars increase in the S and P five hundred index that we'd had in the weeks after Donald Trump's election win, and that has now all been completely wiped out in a big chunk of it from this
the negativity around the tariff news. So neither of you are market analysts, and I wouldn't ask you to comment on that but is this overdone? How likely is it that we will actually have a recession or a serious bout of stagflation as a result of this, These policies that have been it's fair to say, you know, unexpectedly aggressive in the first few weeks of the Trump ad ministry.
Stackflation requires the word stack. Typically in a recession, with contraction of economic activities, you also have a decline in inflation. So for inflation to be rising, meaning that firms continuing to be successful, not just trying, but successful at passing through higher prices. For stackflation to happen, we will need
to see this. And that's not my baseline because I still agree with Powell that inflation expectations are anchored and from what we're seeing, firms actually have very little pricing power left to pass through these price increase And second of all, the second piece of these is that I think that there's just structural component to tariffs and a negotiation component to the tariffs, and the tariffs on Canada and Mexico are the negotiation pillar of tariffs, and those
will go away. My baseline is that they'll come and go really quickly. The ones on China was the ones I have in my baseline, in my earlier baseline last year, I have the tariffs on Chinese goods going to forty
five percent. We're very close to that. Now those will stick, and I think that is the piece that to me, is the biggest source of permanent inflationary risk, particularly because a larger portion of the goods we import from China are consumption goods as opposed to our trade with Canada and Mexico, which are primarily intermediate goods.
And let just quickly come back on you, I mean, careful listeners to this show will maybe note that though you may well think there's an emphasis on negotiation in the Canada and Mexico tariffs, we have all been and you have been surprised so far by how willing and aggressive Donald Trump has been to put these tariffs on. We had a delay, but now against expectations, he's gone ahead with full rate of twenty five percent. Many people
thought it would be graduated. It's fair to say you've been a bit surprised.
Yeah, I was a bit surprised. Then I went back to look at his playbook in twenty eighteen and twenty nineteen. Then I realized there was a long period of the FED in the first half of twenty nineteen where all we worried about actually is not the Chinese tariffs, but on auto tariffs and on tariffs on Canada and Mexico. And recall that Trump was very close to using AIBA on Mexico. Mexico was the country that was able to push the line on using emergency power. This time he
actually used it. So what that period of tariffs spears on Canada and Mexico shows is that it turns out that those two countries are always on Trump's list to hit, even back then.
Catherine, I think there's a few forecasses that are now suggesting that no one is suggesting really that there will be a recession. I mean, are we overdoing this or is there actually in all this uncertainty a possible sort of trigger point where we could be kind of find ourselves in recession.
I don't think it's overdoing it that there's a trigger point out there. I share a kind of Anna's base case that the twenty five percent tariffs on Canada and Mexico likely will not hold for very long, but that's because they're just too economically damaging if they do. And of course, if we end up in that scenario, it changes the call. I think now I'm not seeing stagflation, but if that seems like it's going to maintain, it does change things.
So if we just carry on with the policies that we now have implemented by the administration, the twenty five percent tariffs against our two most important trading partners and the ones that are forecast to come in I mean actually have been declared to come in, that that would potentially be ass cause of a recession where just everyone's vetting on that they won't stick.
I don't think it's automatic res but I think the risk really is there, and particularly there's so much trade between these three countries, there's supply chain impacts that are going to be really damaging. We've just seen the effects of big supply chain disruptions. Of course, this is a different way would play out than during the pandemic, but we know that that can be quite inflationary, and I would just stress that the economic fundamentals going into this
administration were quite good. So this is really kind of a test case of how much policy uncertainty and actual policies now with the tariffs, can we throw at things. And to Anna's point about inflation expectations, the FED is really trying to assess two things. They're trying to assess, is weakening growth that we're now seeing in the data going to feed into unemployment? And they're trying to assess is the inflation risk going to show up in inflation expectations.
These are really the two triggers for movement one way or the other. But the FED, the markets, the three of us are all facing the same uncertainty in actually seeing that underlying data. And so what's really difficult right now is the TPU. The trade uncertainty is likely to remain quite high. We think that this doge uncertainty could be kind of clouding what's going on with underlying payrolls and really giving us some actual negative effects on unemployment.
And this just makes it very hard for the FED to assess do the underlying fundamentals warrant a rate cut or even a rate increase in the face of inflation expectations really becoming unanchored. The other thing that I would just stress is very different from twenty eighteen to nineteen is the initial conditions of this economy and the idea that the FED might have a little bit of a lower threshold for allowing inflation expectations to go up at all.
Here I'm talking about longer term inflation expectations, but I think if those start to move up, it's going to be very hard that have Fed to say, actually, this is just one time tariffs and we'll look through it, because there are so many other shocks in the economy that it's just really hard to make that determination.
I guess I had had a final question for Anna, which is sort of slightly stepping back. I mean, having been through Brexit in the UK and from a lot of these trade things, there's a hit to the economy that's not a fatal, but a sort of measurable hit that you didn't need to have if you hadn't reduced your openness to your major trading partners, something that the
UK has done with Brexit. And the implication of that, it seemed to me, was that you're sort of in a hole, and then you have to find positives that are going to offset that hole. You shut yourself in the foot, or at least you know, stubbed your toe pretty badly, and you have to find some way to make it up. It feels like we're in that kind
of situation. We've decided, for whatever reason, to do this damage to our trading situation, and that's going to have a certain hit, not necessarily a fatal hit, but a certain hit the recovery and to growth and maybe to other things. But do you think and are the kind of policies that investors were focused on at the beginning of the administration that made them positive about growth and investment, you know, the tax cuts being made permanent, the deregulation agenda,
potentially a smaller, leaner government. Do you think all those things are still much bigger, potentially positives than the negatives that we're going to see from this uncertainty and this trade hit. Or do you think, actually we're not talking about very different magnitudes here, and it's a little bit touch and go whether this administration is going to be really good for the economy overall.
That's a really good question. My read of the economic framework of the administration, or at least the beliefs of the top economic policy advisor, how they see the economy, how they interpret the world, is that they truly think the size of the government is too big, and they are focused on getting rid of this crowding out effect which they see as generating more regulations which is inflationary,
and also reduce productive capacity and economy. So everything they're doing right now with the DOCHE cuts is to shrink the size of the government. At the same time, the policy package include raising tariffs because they need to. What they want to do is to raise the taxes on the foreign and international sector while lower the barriers and taxes in the domestic economy. So it's like a full package.
You can't see each pillar in isolation. Right, it looks like a lot of the contour of the economic impact of DOCHE and tariffs from all our model are concentrated in the first two years. The trade policy uncertainty, it actually goes away really quickly. If Trump suddenly to wait, I'm making a deal, and then the next day you
see that policy uncertainty plunging faster than the actual tariff level. Right, the tariff level will takes time to go down, but it actually is the decline in trade policy that would
suddenly spur this reversal of growth. So I think, based on all the models I've assessed that whatever the positive benefits of this DOGE and deregulation agenda, and also the pernicious effect of tariffs will start to fade away in the second half of Trump's administration, while whatever benefits to the fiscal agenda will start to kick in the second half.
So basically JD. Van's election as the twenty twenty eighth president is really a bet that this contour of the benefits of their economic agenda will start to kick in in the second half, while it would be pained in the first two years.
Well, and of course today will be when they start dating the Trump vance recovery and they'll forget about anything that happened to the stock market before. I think that's excellent, Anna. It is indeed a period of transition and a transition to who knows what, but I think we'll be charting it in in Trumpanomics. It has been a very trump andomic episode. But thank you very much to Anna and to Catherine. I'm sure we'll have you both back. But
that's that's it for now. Thank you, thanks for listening to Trump and Nomics from Bloomberg. It was hosted by me Stephanie Flanders, and I was joined by Anna Wong and Catherine Holston. Trump and Nomics is produced by Summer, Sadi and Moses and with help from Chris Martlu and sound design by Blake Maples. Brendan Francis Newnham is our executive producer and to help others find the show, please rate and review it highly wherever you listen to podcasts