The Economic Impact of Trump’s Policies

Initial pro-business sentiment following the election quieted a bit after the Trump administration issued a series of tariff announcements and retractions that roiled the stock market. With tariffs still on the table, Michael Feuz, an economist with ITR Economics, sits down with Middle Market Growth to discuss how Trump’s policies on trade, inflation, deregulation, immigration and more could impact the economy more broadly and dealmakers specifically.

Read a transcript of the podcast below.

Middle Market Growth: Welcome to the Middle Market Growth Conversations podcast, an ACG production, I’m Katie Maloney. Since President Donald Trump’s inauguration on January 20, things have moved quickly with major changes to economic, foreign and immigration policies in the early days of his administration. Here with us today to discuss the Trump administration’s actions past and future, and the effects we’ll see economically is Michael Feuz, an economist with ITR Economics. Michael, welcome to the podcast.

Michael Feuz: Yeah, thank you for having me, and I’m looking forward to our conversation today.

MMG: I want to start off with tariffs. That has been the big news over the last few weeks—front page headlines, fast-moving changes to trade policy that we’ve seen since President Trump took office. So, Michael, I’d love to hear what your thoughts are on how U.S. tariffs are playing out so far this year and what kind of impact you’re expecting to see from tariffs on the economy over the longer run.

MF: Yeah, that’s a big question. Right now, I think everyone’s general consensus probably is uncertainty. It’s a lot of start, stop, look over there, don’t look over there, we’re going, we’re not going, we’re going but we’re going to change this. So there’s a lot of uncertainty, especially among business leaders. And I’d say that’s really the near-term risk right now, because uncertainty slows activity. For businesses, investment dollars, a sense of predictability with laws and regulation—that’s a key and critical factor for economic growth. And we’re coming out of 2024, and at ITR, we’re calling it the bottom of the business cycle. We’re kind of scraping the bottom of the economy. We spend a lot of time looking very much at the industrial side—manufacturers, utilities, oil and gas, construction companies—and we’re kind of scraping that bottom and still forecasting 2025 to be better than 2024, but more towards the second half. But this uncertainty has a risk of kind of dragging out the sluggishness in this first half of the year and maybe bleeding over more so into that second half. So, for business leaders, certainly that uncertainty, but also lawmakers, all of us as private citizens…[there’s a] real lack of clarity too, on the goal when it comes to tariffs. Could it be—and I mean, it’s a wide range—insufficiency with cooperation with Mexico and Canada when it relates to fentanyl trafficking? Is it…do we want more military funding out of Canada right now for playing their part as a member of NATO? Do we want to offset non-tariff impediments to U.S. goods and services? Are we trying to increase domestic production? There’s still uncertainty what the goal is, and there’s still uncertainty of what things are going to look like when the dust settles. So on the short term, that’s the risk. On the longer term, there’s a little bit more to unpack. Tariffs are more micro than macro, which means it’s going to impact not so much GDP or overall industrial production, but it’s going to have different impacts on different sectors. It’ll help some; it’ll hurt others.

MMG: You mentioned Canada and Mexico, and I wanted to ask you about some of the retaliatory tariffs that are being announced in response to U.S.-imposed tariffs. Another area that is very uncertain and seems to be evolving minute by minute, but I wonder what you think about how some of the retaliatory tariff actions will play out and how those decisions will impact businesses.

MF: This is the big question. It’s next to impossible to predict how it’s going to play out, but retaliatory tariffs [are] where more of the risk lies. Obviously, the retaliatory tariffs are going increase costs, they’re going to present obstacles, challenges for U.S. businesses. And in the end, the consumers, they’re going to bear the costs. At ITR, we say tariffs are inflationary. If you are in school right now taking an economics class, or you go back for school, don’t put that on your test. It’s technically the wrong answer, because inflation’s a steady, gradual, steady increase of cost. Tariffs are a one-time hit. But if you’re a business leader, anytime your prices are increased, it’s inflationary. We can call it that. The risk is typically when we see tariffs, and we can look back at 2018 for this, those 2018 tariffs, you see an initial bump in prices and then they tend to kind of teeter off. If you look at steel prices or aluminum prices back in 2018 and look a year out into 2019, we saw that initial bump for about three to four months and then things started to come back down. But retaliatory tariffs can create just consistent price increases on businesses, and we don’t get that settling back down so that’s where the real risk is. And with Mexico and Canada, those are our top two trading partners. Mexico’s one, Canada’s two, China’s three. Coming out of the pandemic, there’s been a lot of decoupling from China as we’ve not only gotten that onshoring, but we’ve gotten that nearshoring, and Mexico and Canada have always been important. We’ve been intimately connected them for obvious reasons being so geographically close, but now even more so as we’re looking to move more and more away from China. So that’s just the uncertainty and then the impact on our top two trading partners is certainly going to put an upward pressure on prices.

Another big risk that I think is probably worth highlighting, maybe it’s a little out of place here. I mentioned just a little while ago, it’s more micro than macro. Meaning some will be harmed by tariffs—they’re going to feel those prices. Others will benefit, meaning, hey, I was just at a conference. I had some U.S. steel manufacturers there in the crowd and was talking with them. They were excited about tariffs because their competition from Canada had a, one told me it’s about 20% price difference. He was excited. But the big risk I’m concerned about for businesses who are going to benefit from tariffs is that tariffs are an unnatural competitive advantage for those protected businesses. And those that are protected are less incentivized to invest in their business and in R&D to innovate. And over the long run, that could be certainly be harmful, especially as we’re looking at the rest of this decade: We’re going to have a growing economy, but [with] labor shortages and inflation returning, it’s critically imperative for businesses to be invested in their processes and automation and protected industries are going to be less incentivized because they’re just enjoying this unnatural competitive advantage. But kind of bringing that back home to Canada and Mexico, to kind of put a bow on that, the real risk is those retaliatory tariffs because that’ll keep those higher prices continuing to elevate.

MMG: Interesting. Well, and another benefit, aside from the artificial lift that tariffs may bring some industries, that I have heard touted in some corners of the M&A community is, can tariffs spur outside foreign investment or M&A activity as foreign entities look to get a foothold within the U.S.? I wonder [about] your reaction to that, whether you think that’s a likely outcome, and if so, if there’s kind of a time horizon for when we could expect to see some of that activity?

MF: Yeah, that’s a really great question. So, we’ve seen really since 2010, a rising growth in foreign direct investment and onshoring. It’s been pretty steady since 2010 and really picked up substantially after the pandemic due to the lack of trust in China, geopolitical risks, as well as just that desire from businesses to secure their supply chains by shortening them. Now at ITR, we’re really good friends with this group called the Reshoring Initiative, and I just saw a good statement put out by them where, and we’re in agreement, that the mere threat of tariffs could be enough to firm up some plans, like I’m thinking about moving stuff back into U.S., but most of those projects will only move forward once those tariffs are in place and there’s confidence, so that lack of certainty abates and they’re likely to remain where they’re at. So likely if you already have the plans, you’re moving forward with them. It’s a rising trend. I do have one client I was talking to recently and they mentioned that one of their biggest customers is moving because of tariffs from Canada into North Carolina. So, that’s one example on that side, where they’re actively moving even with the uncertainty. My hunch is more will follow. We’re going to wait and see till we get a little bit more certainty. And those had already had plans are going to move forward. But again, if that one primary policy goal for tariffs is to grow American manufacturing capacity [and] bring jobs home, I think tariff uncertainty is going to delay that. And there’s also that risk we see where it’s looking at who’s the next president as well. Meaning if we need to expand capacity to take on these manufacturing and nearshoring jobs, but the big overarching questions in four years, we don’t know who the next president is. If they reverse course and I’m re-exposed to international competition, do I want to invest the billions of dollars needed to expand that capacity as well? But that trend is ongoing. We’ve seen, it’s estimated, between 40 and 50% of the jobs we lost to offshoring have already been reshored since 2010, brought back, and we’ve seen close to the equivalent of about 2 million jobs return. And that’s trying to parse out, it’s a rough estimate between actual jobs and what foreign direct investment’s creating.

MMG: Got it. So, it sounds like we really need this uncertainty to abate to kind of understand the strategy, which tariffs are going forward, how that does settle, and then kind of reevaluate the playing field.

MF: Yeah. That’s causing a lot of hesitation right now.

MMG: You know, another thing that President Trump promised on the campaign trail was a major immigration crackdown, which has potential implications for almost every sector that has labor from tech to agriculture to restaurants and on and on. I wonder, Michael, which areas you imagine will be most affected and what some of the broader economic impacts are if we were to see the administration deliver on those promises of mass deportation?

MF: Yeah, we haven’t seen the mass deportation yet. I think there was like some early [on]; at least the media was picking up on stuff early on, soon after the inauguration. But if you look at deportations by day, it’s nothing alarming yet. So, we’ll see in that case what actually transpires, if there is mass deportation and what quantifies as that. But I think certainly it will have an impact. We already have labor constraints in this country. We have open jobs outpacing those people actively looking for jobs, so that demand for labor is outpacing the supply. The big one that sticks out to me is the construction industry. We have affordability constraints, especially in residential construction. We have a housing shortage still. Our inventory is about one third of what it was before the great recession. So, there is a shortage, and the estimates are about 13% of total construction labor is undocumented immigrant labor. If we disrupt that 13%, that’s significant; that’s going to make it harder to produce houses. That’s going to push the upward pressure on wages. There’s already enough upward pressure. Wages are growing, wages do not come back down outside of a great recession type of situation that would correct wages again, and even then, probably would just keep them flat. So, this is going to add to the affordability constraints and the ability to get the needed housing inventory up to where it needs to be per the demand. And there’s a lot of would-be demand sitting on the sidelines in construction, folks that would like to buy their first house or their next house but just can’t afford it. Especially those first-time home buyers who don’t have 20% or more to put down and 7%, 6% interest rates plus closing costs. It keeps a lot of younger folks, you know, new couples that are trying to form a family and get started just sidelined or continuing to rent.

MMG: You know, I did want to ask, you touched on the inflationary pressures that stem from tariffs and labor shortages. Inflation has proved pretty sticky, although we did see some good news as of the morning of this taping, which showed that consumer inflation did slow up a bit in February. But I wondered, Michael, if you could speak to your inflation outlook for the rest of this year, and what you’re expecting to see from consumer prices.

MF: Inflation, we see it generally easing, although it’s going to be mild easing. We see the low probably forming close to June and then kind of hanging out where we’re at: high twos, low threes after that, into early 2026. By the middle of 2026, though, we do see inflation coming back. We’re seeing about 4% inflation by the middle of next year. So long term, looking out through the rest of the 2020s, we see this decade as a period of higher inflation. Now we do see it coming back down, kind of easing, and again, as we get into 2027, but then starting to push back up again. And by the end of this decade, 2029, I don’t want to be depressing here and look too far out, but we see it getting back up to seven plus percent again as we round out the decade. What does that mean for consumers? Well, one, for businesses this year you’re going to get a kind of a sweet spot opportunity of a low point of inflation, stable interest rates and a growing economy, especially post-June. That’s going to give you a lot of opportunity to capitalize on growth. But also you should think about raising your prices as we’re telling everyone because consumer sentiment, business sentiment should be up in the second half of this year. We’ll be willing to take those price increases. So, we’re telling a lot of our clients [to]  have a very intentional pricing strategy because by 2026 we’re going to be feeling that 4% inflation in the middle of next year. We’re not going to have that sentiment again. We’re not going to be really willing to just willingly accept any price increases that the second half of this year we might be feeling pretty good about and might not even notice it too much. But long term, just different than the rest of this decade. And it’s driven by a lot of factors. It’s a tight labor market—wages don’t cause inflation, but they always lag. But once they catch up, they keep the new baseline set and it can create a feedback loop. But looking at energy costs, electricity, the monetary [supply], we’re already seeing the money supply grow, that’s the primary driver of inflation. And then government spending, it’s been just astronomical. That’s always a leading indicator and a big driver of inflation as well. So just different than what we felt in the 20-teens.

MMG: And then from a rate standpoint, how are you expecting the Fed to respond? What are you forecasting in terms of rates?

MF: Our outlook is rates more stabilizing than easing much more. The low point of rates, you’ll probably see it between June and September of this year, but it’s not going to be significantly different than where we’re at right now. So if you’re looking for that super sweet spot, that’s your timeframe. Maybe buying that house if you’re on that side. If you’re a business, though, and looking at Capex investment and financing, it’s probably more important to not worry so much about the sweet spot for rates, but ask yourself, when do I need the return on my investment? When do I want to start recouping that? When do I want to start getting that return? If you need it sooner rather than later, you know, we’re telling our clients invest now. It’s going to be pretty insignificant what you’re going to get four to six months from now. After that, probably stabilizing as we go into next year but as we get into next year and feel that 4%, there’s a risk that they might increase rates 25, 50 basis points again. The rhetoric will probably start hinting at that as we get towards the end of this year to kind of get us ready for it. We don’t forecast the Federal Reserve, though—they are human beings like the rest of us, emotionally-driven creatures, which means while they’re supposed to be an independent bank, I’m using the air quotes there, they want to get invited to the cocktail parties that the bureaucrats and the politicians get to. And if they make them upset, you might not get your invite. And if we will look at that dot chart where they all project where they want or where they think the rates will be going, you know, if you get in a fight with your spouse on the way to that meeting that day, you might slap that dot somewhere different. If your kid won’t move out of your basement, you might slap the dot differently. So there’s a lot of human factors behind it. So we don’t forecast the Federal Reserve, but we do pay attention to what they say. We look at the long-term trends, of course, we look at the long-term bond yields, what the investors are predicting with inflation. All of that informs our outlook.

MMG: I want to be sure to ask you too about deregulation. You know, this was something that the Trump administration has expressed an appetite for. So, I wondered if there are deregulatory initiatives under discussion that you’re watching with potential impact for the business community.

MF: That has been a stated policy goal for this Trump administration. [It] certainly would bode well for businesses, right? Deregulation, there’s regulatory costs that are significant. I’m trying to remember off the top of my head the amount of cost on the economy that regulation places. I can’t remember. I feel like I’d be making it up, but I want to say it’s close to $800 billion of regulatory costs. Any reduction of that will significantly help spur growth, put more money in the pockets of businesses to reinvest in their business, which is critical for growth. So, that’s an upside positive. I know coming out of the election we saw the uptick in the stock market. Wall Street liked the outcome. They were more confident. Now, we’ve kind of lost all those gains with all the uncertainty with tariffs so we’ll see. And certainly, probably sidelining a lot of investment right now or just delaying it. But if you’re in the oil and gas space, we’re watching that one very closely. This administration’s an upside risk, we’ll call it, a positive for the oil and gas market. Any policy comes out in regard to that is going to be something that’s going to help spur further growth, further production of oil and gas. They’ve stated they want to reduce energy costs. They think that’ll absolutely help with inflation. It certainly would. But the question always comes down to policy choices, understanding the goals of the policy. And then as economists, we want to evaluate that, all right, here’s your goal, here’s the policy you’re pursuing, will that achieve it? What are the risks? What are the unintended consequences? And that’s how we kind of tackle it. We’re always…no one really likes economists. We’re always the Debbie Downers because we’re telling you all the things that could go wrong and no one wants to hang out with us.

MMG: And actually, that’s a very good segue into my closing question, which is that ITR economics has been predicting a second great depression for the 2030s for some time. So, I wondered if that’s still the case, if that’s still something you’re expecting to see in that decade, and whether any of the policy decisions or actions that we’ve been discussing have any bearing on that forecast, either by postponing that eventual recession or maybe ushering it in sooner?

MF: Yeah, we’re still predicting a 2030s depression that we see lasting between 2030 to 2036. So just call it challenging economic times. We’ve kind of dropped the “great” because it conjures up thoughts that we’re all going to live in Oklahoma in some mud hut and tumbleweeds will go by. That won’t be the case. Oh, and Oklahoma also is a great state. I’ve been to Oklahoma City, and I don’t want to bash Oklahoma. But it will be about six years of economic decline driven primarily by the impact of demographics, the aging baby boomer population, the needs that they’re going to put on entitlements from Social Security and Medicare, where our government debt currently sits, where we see inflation and just the labor shortages to replace them. Nothing’s changed where we see it, we see a 2030, we see it happening potentially in 2029. It might not tick off till 2031. For simplicity, we say 2030. For our clients that we advise, preparations, we want them either, whether you’re going to sell your business, or you want to be set and ready and minimizing your debt heading into that decade. We’re looking at 2028 as you know, you don’t want to be playing with fire in 2029. I also don’t want to scare people. We’re going to, the U.S. will remain the world’s number one economy in the 2030s. Europe’s in a worse spot than we are with the same trends. Asia’s in an even more significant spot, worse spot. We’re going to remain, you know, 25 trillion on a nominal dollar. Again, that’s just a rough number I’m throwing out. But a trillion-dollar economy, we’re the place you want to be. And it’s not going to be straight decline. It’ll be, if there’s a peak that we reach around 2030, the GDP I’m thinking about, or industrial production, the same starts to decline, I’m really thinking about industrial production. There’ll be a period of decline. There’ll be a period of rise, but that new peak won’t return to where we were. It’ll be descending peaks and we’ll have several descending peaks in that six years, and we’ll reach the low around 2036 and then begin to come out of it. But yeah, we’ve been talking about that since before 2014 when Brian and Alan, the Beaulieu brothers, put out their two books. There’s more and more consensus that the 2030s are going to be challenging, but there’s some companies that will do very well. There’s enough time to prepare for it. We’re going to get the next five years of economic growth: a lot of opportunity to make a lot of money as well as position your business to do well and at least mitigate the pressures that the 2030s will be bearing everybody.

MMG: Well, and history bears out there are economic cycles and there’s boom times and there’s bust times, and I think we’ve maybe gotten a little spoiled over periods of growth, but inevitably there will be another dip. And I appreciate the specificity of that timeframe. I think that’s very helpful for planning and I know our listeners will appreciate that insight very much.

MF: Yeah. And of course, follow ITR. We put out a lot of free content on the 2030s on our website. So, we’re always updating and watching. It’s a big question everyone’s asking us.

MMG: Great. Well, Michael, thank you so much for joining me today. I’ve really enjoyed our conversation.

MF: Yeah, I did too, Katie. Thank you for having me. It’s been great being here.

This transcript was prepared by a transcription service. This version may not be in its final form and may be updated.

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