The Economic Situation: March 2025

Welcome to the Chinese year of the snake! If the past month is any indication, it’s going to be a doozy.

With the change in political leadership, citizens, interest groups, and government workers have begun to grapple with “regime uncertainty”—when ordinary folks can’t predict what the government will do next. While such high uncertainty is normally viewed negatively, it appears the new Trump administration thinks otherwise. Politically generated uncertainty can set the stage for negotiating the next deal or for revising older ones, whether it is about tariffs, border controls, taxes, or government spending. The stakes are high because this US-generated disruption reaches beyond the nation; it includes Greenland, Canada, Mexico, Panama, perhaps Ukraine, and beyond.

This is nothing new. We the People have experienced serious uncertainty during the Great Depression, during and after World War II, after the 1970s disruptions when Arab oil exporters cut off the flow of energy to the United States, and more recently during the COVID-19 pandemic. Sometimes the related disruptions came when the economy was weak and GDP growth was headed south. At other times, the economy was strong and resilient, making the shocks of change easier to absorb.

Today, with the new Trump administration stepping high and announcing major changes, the US economy has been performing at a positive clip, even though affected by the aftermath of the pandemic, rapid technological advances, and wars in Ukraine, the Middle East, and Congo. The most recent Department of Commerce real GDP growth estimate for the fourth quarter of 2024 came in at 2.3 percent, which gave 2.8 percent growth for 2024, slightly lower than 2023’s 2.9 percent.

New job formation continues apace, and incomes are growing more rapidly than the rate of inflation, which until recently had been falling but most recently has risen a bit. On the downside, with economy activity driven by growing federal government debt, we have seen heavier employment growth in government itself and in health and human services. Meanwhile, while the interest cost of the debt has soared, goods-sector growth has languished. That said, we must consider the effects of the Trump agenda.

Trump’s “shoot from the hip” agenda

Trump policymakers may be thought of as generating a new equilibrium with respect to deportations, taxes, tariffs, regulation, and participation in the world economy. While the Trump proposals form a mixed bag of possible negative and positive effects, rebalancing is necessarily disruptive to the status quo and therefore costly while transitions are being made. 

Yes, Trump may be using policy uncertainty as a negotiating device to gain approval for his policy agenda. For example, instead of moving forward immediately with his promised tariffs on Chinese imports, which at 10 percent are now in place along with 25 percent tariffs on Canadian and Mexican imports, Trump indicated he would rather keep the Chinese guessing. In a similar way, the 90-day freeze imposed on most foreign aid by the State Department can be seen as drawing a line from which new deals will be made before aid is renewed. A similar observation may be made about the recently proposed employment buyouts offered to two million federal employees. Trump appointees can determine which acceptances may be encouraged. Still, given the US economy’s reasonably good health, it is possible for disruption to occur without pushing the economy into recession.

Even before the inauguration, President-elect Trump and his close advisors were deeply engaged in America’s policy battles. Yet as I consider the actions, I can’t identify a single, principles-based “north star” to shed much light on his agenda. Maybe that will soon emerge, or maybe there will never be one. For now, the policy pronouncements say there’s a new sheriff in town who shoots from the hip. That means it’s up to us to navigate the uncertainty.

As to policy changes, there are the familiar stances—from deporting undocumented immigrants and protecting borders to revising tax policy and imposing tariffs on countries and regions that do not respond to Trump’s trade demands. There’s also talk of buying Greenland, recovering control of the Panama Canal, making Canada a state, and ending Daylight Savings Time. There are orders to end birthright citizenship, withdraw from the World Health Organization, end the federal government EV mandate, and change the name of the Gulf of Mexico to the Gulf of America. Moreover, there are efforts to compel the European Union through tariffs to increase purchases of US oil and natural gas (even though the EU itself doesn’t buy energy and America is basically sold out) and to support the union in an ongoing South Carolina International Longshoreman’s organizing effort.

As if that weren’t enough, there are proposals for expedited environmental approval and permits for new $1 billion investments, trying to keep TikTok afloat, and cuts in Federal Reserve (Fed) staff, and perhaps more critically, a demand that the Fed reduce interest rates. In a confusing action for those seeking to find a logical, predictable basis for what is going on, Trump celebrated a $100 billion investment in the United States by the Japanese firm Softbank but opposed Nippon Steel’s efforts to acquire U.S. Steel, while offering high praise for a $500 billion AI investment in America by Softbank (Japanese), OpenAI (United States), and Oracle (United States).

Although it seems impossible to find a principles-based pattern to help explain President Trump’s recent actions, we must acknowledge that the accompanying uncertainty causes some investors to take a wait-and-see attitude for large investments that might be healthy or necessary. Other investors, consumers, or policymakers who are worried about the effects may try to get things done ahead of the proposed change. There is an undeniable rising tide of regime uncertainty.

Risk and uncertainty

Writing in 1921, Frank H. Knight famously sharpened the distinction between risk and uncertainty. Risk can be viewed as measurable, data based, and therefore subject to scientific interpretation. Uncertainty, on the other hand, is messy, subjective, and widely interpreted. As Knight explained, dealing with uncertainty gives rise to economic profits and losses, whereas the cost of managing risk becomes a basic cost of doing business. But while Knightian uncertainty is appreciated theoretically, FRED’s Economic Policy Uncertainty Index, based on the frequency of particular words in 10 daily newspapers (shown in figure 1), helps us visualize uncertainty’s ebb and flow. Since Donald Trump’s presidential campaign victory, uncertainty has risen and stayed at a higher level. Some of this uncertainty may be reflected in GDP growth forecasts for the year ahead.

Further, examination of state economic indicator changes offers a very short-run view of how economic activity is spreading across US regions. In figures 2a and 2b, I provide the November and December 2024 coincident indicator maps produced by the Federal Reserve Bank of Philadelphia. I note that there are more orange (negative growth) states in the December map but more than a small handful of brighter green (higher growth) states as well. Generally speaking, the northeast region continues to be in relative decline and growth in the pacific northwest is accelerating. 

The year ahead

In the table below, I report GDP forecasts for the next five quarters for the Philadelphia Fed’s economics panel, The Wall Street Journal economists, and Wells Fargo economics. I call attention to how the forecasts diverge for the last half of 2025. This, I think, illustrates the presence of Knightian uncertainty. Along with questions regarding tariifs—how much, when, and wherewe might need to be reminded that GDP growth is determined by how many people go to work each day. With deportations that number is falling. 

The rest of this report will explore these threads in greater depth. 

Trump 2.0 and the Reagan Revolution

As is often said, the more things change, the more things seem the same. Facing a struggling economy and weary electorate following his 1980 landslide victory over incumbent Jimmy Carter, Ronald Reagan touted “Morning in America.” The new president indicated that “government is not the solution to our problem; government is the problem” and promised to “drain the swamp”—a phrase to be heard again—by cutting budgets, reducing regulation, and thinning the ranks of federal employees.

So began the Reagan Revolution. Announcing in his inaugural address that “the golden age for America begins right now,” Donald Trump’s return to the White House looks eerily similar in some ways, especially as details of his plans to streamline government emerge. Drawing too close a parallel would, however, be a mistake.

The circumstances that spawned Reagan and Trump inspired their plans for reshaping government. Reagan took office with 2.1 million employed in the executive branch. His election followed an economic upheaval caused by high-priced oil, price controls, heavy-but-failing investment in synthetic fuel production, skyrocketing inflation, and heaven-bound interest rates. To make matters worse, failed foreign policy had led to more than 500 Americans being held hostage in Iran.

Election Day 2024 may one day be labeled as another revolution—or, maybe, as a disruption—lifted by a Reagan-like patchwork of blue-collar workers, rural Americans, and coalitions of minority groups. In a similar way, it followed major economic disruptions caused by a pandemic that killed 1 million Americans, an extended economic shutdown, excessive stimulus spending, runaway inflation, and severe foreign policy challenges in the Middle East and Ukraine.

An electorate also troubled by offshored industrial jobs and failed immigration policies heard Trump’s shouts of “Make America Great Again.” Trump did not match Reagan’s 484 electoral votes but won an impressive 312 versus Kamala Harris’s 226.

Inheriting some 2.3 people million federal workers—about 10 percent more than Reagan—Trump now brings back promises to “drain the swamp” and give the government shock treatment with major department closings and regulatory and worker rollbacks.

Today, the number of federal regulations is another story. In 1980, the Code of Federal Regulation, the resting place for all active federal rules, stood at around 95,000 pages. Last year, the count was about 195,000 pages. In this way, We the People are more restricted by rules than ever. Pages of regulation, not the number of people employed in government, are the first thing that should be rolled back. The process for doing so is well underway.

The timing to reassess the scope of our government was right in both cases. After years of unrelenting federal intervention, it’s time to rebalance the economy and search for a new normal.

Government operations under review

To bring fundamental change, Reagan’s enthusiastic budget director, David Stockman, set in motion review activities that aimed to reduce the cost of governing. These were supplemented by the activities of the Grace Commission, headed by industrialist J. Peter Grace. The commission brought on 150 private sector executives, funded by a separate foundation, who worked throughout government to find ways to save money. Grace instructed his fellow workers to “be bold and work like tireless bloodhounds, don't leave any stone unturned in your search to root out inefficiency.”

In 1984, the commission provided 2,500 recommendations, which it claimed would save what would have been $1.3 trillion in 2024 dollars over three years if fully implemented. Since many of the recommendations required legislation that was not forthcoming, the realized savings fell to $300 billion in 2024 dollars, which is not chump change.

Trump is following the pattern seen in Reagan’s Grace Commission. He named multibillionaire Elon Musk and former GOP presidential candidate Vivek Ramaswamy to lead a non-governmental Department of Government Efficiency with the goal of finding ways to cut $1 trillion from federal spending. Sounds familiar, doesn’t it?

Trump and Reagan sought similar goals for government reform, but there is one fundamental difference separating them: Reagan spoke fervently for unleashing the free spirit of man—of all men and women, wherever they lived, even behind the walls that once divided East from West Germany and Americans from competing nations. 

Reagan supported freedom and free trade, while understanding that at times the goal would be compromised. In some of his most spirited words, he told of how he wanted America to be like a “city on a hill,” describing this vision in his 1989 farewell address to the nation:

I’ve spoken of the shining city all my political life, but I don’t know if I ever quite communicated what I saw when I said it. But in my mind, it was a tall, proud city built on rocks stronger than oceans, wind-swept, God-blessed, and teeming with people of all kinds living in harmony and peace; a city with free ports that hummed with commerce and creativity. And if there had to be city walls, the walls had doors and the doors were open to anyone with the will and the heart to get here. 

Trump has another vision of America, presenting himself as a Colossus standing in our harbors, bargaining across America’s closed borders to determine who and what may enter. As he works to shrink the federal government and redirect the economy, he renews his commitment to controlling Americans’ purchases with high tariffs and deporting or walling out immigrants he deems as unwanted or unneeded.

The result, if somehow successful though the exercise of leverage or other means, cannot be considered a Reagan-like revolution. The government may become smaller and more efficient, in some sense of the word. But the nation’s movement toward being a symbolic shining city on a hill will have to wait.

Lessons for Economists

In his analysis of Donald Trump’s strong White House victory where many traditional Democrat supporters voted Republican, Senator Bernie Sanders pointed to working class anger as a principal reason: “Here is the reality, the working class of this country is angry, and they have reason to be angry. We are living in an economy today where the people on top are doing phenomenally well while 60 percent of our people are living paycheck to paycheck.” A 2023 report on household net worth for 2019–22 from the Federal Reserve Board supports the senator’s argument. The Fed found substantial increases in average net worth for all income growths except for the lowest quintile of families. Despite all the COVID-related stimulus programs, these experienced a small decrease. What happened?

According to Senator Sanders, a rising level of greed caused those in the top income tiers to garner more wealth than those at the bottom. I doubt that greed did it, but, paradoxically, massive efforts by government to soften the blows of the COVID pandemic certainly helped the rich get richer.

The government’s massive stimulus program and Fed interest rate cuts led to rising real estate prices and substantial gains in stock market values. Yes, inflation took off, but higher income households are less damaged by inflation than people who spend most of their income on goods and services. On top of this, some federal programs disproportionately transferred billions to owners and managers of businesses across the nation rather than to hourly workers. In a real sense, hourly workers lost out relative to higher income households. In addition, lots of COVID-relief money simply got wasted. Let’s take a closer look.

Stimulus funding

Cecilia Rouse’s recent review of “lessons for economists from the pandemic,” in Reporter, a publication of the National Bureau of Economic Research, offers a revealing and disturbing analysis of the pandemic. President of Brookings Institution and former Chair of the Council of Economic Advisors (2021–23), Rouse focuses on the effects of the pandemic itself and the massive $4.5 billion total in stimulus packages delivered by the Trump and Biden administrations to soften those effects. Both the effects and efforts to ease them were massive and, at times, perverse. While we may not get high scores for learning from history and altering future behavior accordingly, it is still a good idea to try.

Though the COVID pandemic occurred just five years ago, it is well to be reminded that at the time of Joe Biden’s 2021 inauguration, some 460,000 Americans had been killed by the virus. Before the pandemic’s end, some 1,219,000 US lives would be taken. As to devastating disruption in daily life, Rouse points out that in April 2020 “the number of Americans living under stay-at-home orders reached more than 300 million.” Weekly claims for unemployment compensation rose from a typical level of 207,000 in March 2020 to 6,137,000 in April 2020. 

Then, driven by massive stimulus spending, employment recovered in record time. The nation dealt with one of the most severe but short work-life disruptions in modern times. And, given the serious bout with inflation that followed, this situation prompts important questions: Was the massive stimulus too large? And what about waste, fraud, and abuse? Was the stimulus spending targeted so that working-class people got a good share of the money? Or was the system tilted so that higher-income people gained a lot? Rouse examines two COVID relief programs as she addresses these questions.

The $800 billion Paycheck Protection Program (PPP) provided forgivable loans to small businesses, for-profit and non-profit, to retain workers, meet payroll and insurance costs, and keep the business doors open. A second program, the Economic Injury Disaster Loan (EIDL) program, provided larger loans payable over 30 years. Some one million firms received PPP loans, and 3.9 million obtained EIDL loans. Researchers show that two-thirds of the PPP forgivable loans went to business owners and shareholders, not to employees or wage earners. The General Accountability Office indicates that PPP fraud totaled $64 billion out of $800 billion in loans. Estimates of fraud under the EIDL program indicate that $136 billion was siphoned off. Other research indicates that PPP loans cost between $169,000 and $256,000 for each job saved, more than twice the annual wage of the workers effected. With owners and executives at the top siphoning off money, the average cost of protecting wage-earning workers rose.

Let us hope that our nation never faces another tragic pandemic, but if it does, let us hope that we will find more effective ways to cushion the accompanying economic pain. Yes, the pandemic may have helped the rich get richer, but it also hurt lower-income people in more ways than one.

For those who hope to see the US economy return to pre-pandemic levels of activity, this year’s employment data, while showing considerable strength, must still be discouraging. The data are reminiscent of American novelist/playwright Gertrude Stein’s comment following a disappointing visit to her childhood hometown where she hoped to see familiar sites from long ago: “There is no there there.” In our case, rock-solid employment growth in manufacturing and goods activity just isn’t there. Instead, activities supported by federal deficits and debt such as healthcare and all levels of government—along with a recovery of the dining-out industry—are looking pretty good. 

Yes, total employment has recovered, real wages are rising, and the unemployment rate is comfortably low, but during the last year just three industries—Leisure and Hospitality, Government (G), and Health Care and Social Assistance (HCSA)—account for 75 percent of the payroll employment growth tracked by the Bureau of Labor Statistics. Two of these, G and HCSA are dependent on federal funding, which means increased federal debt. Before the pandemic, these same industries explained 45 percent of growth. (I note that federal public debt has increased from $23.1 trillion in 1Q 2020 to $35.4 trillion in 3Q 2024.)

It’s a mistake to expect that the economy would generate a repeat of pre-pandemic activity, anyhow. That world is gone. We get a slightly different economy every day; and after many days and years, the one at hand is far different, and maybe better in some ways, than the one we had in 2019. 

Harking back to Gertrude Stein, there’s a new there there, and it has to do with an explosion in small business start-ups.

The start-up boom

There is an ongoing boom in new business applications tallied by the Department of Commerce that first began during the pandemic, perhaps because a lot of workplaces were shuttered and people, stuck at home, had to make a living. In 2020, the number of new applications jumped from an ongoing level of about 300,000 per month, to over 400,000. The higher pace has continued. In November, the Department of Commerce recorded 448 thousand new business applications. Of these, some 28,000 are expected to have a payroll in four quarters. Interestingly, the individuals involved with these new starts aren’t counted as additions in the Bureau of Labor Statistics employment report, since they are not on a payroll.

Of course, most of these tadpole companies don’t make it to maturity, but some do, and the growing number of firms that flourish is the source of America’s future prosperity. Not too many years ago, Amazon, Dell, Microsoft, and Nvidian were start-ups. A recent McKinsey Global Institute analysis indicates that small businesses, those with fewer than 500 workers, produce almost 40 percent of value added nationally and grow into a meaningful share of very large corporations. Those same smaller firms over the past 25 years produced almost 50 percent of US industrial output. More to the point, research reported by Brookings Institution indicates that the Department of Commerce count of new business applications predicts improvement in GPD growth with considerable accuracy. There’s more to this story than just numbers. It’s felt in people’s lived experiences.

Yes, when we look closely at what it going on in today’s start-up economy, we find there’s a new there there, and it looks pretty good.

President Trump’s Tariff Plans

There is little doubt that tariffs or the threat of them will loom large in the Trump administration, though it is not clear just how they will operate or when they will be imposed. In other words, we are experiencing tariff uncertainty. And that, it seems, is Trump’s intent. Following the election, Trump indicated: “On January 20th, as one of my many first Executive Orders, I will sign all necessary documents to charge Mexico and Canada a 25% Tariff on ALL products coming into the United States.” Trump also amplified his intention to add another 10 percent to tariffs on goods from China. The tariffs arrived on February 1. Yes, the “Tariff Man,” as he likes to style himself, is back in town, and the pros and cons of his approach—largely continued by President Biden—have been on display for years. Yet anytime government sausage is made, there are also ingredients we can’t easily see.

More than reinforcing an America First promise to protect US industries and jobs, Trump presents his latest tariff foray as a way of bargaining. For example, he indicates he will reduce the proposed tariffs on Canada and Mexico when the affected countries eliminate shipments of drugs and illegal immigrants coming into the United States. More recently, Trump suggested he would use tariffs to bargain with China over TikTok.

Anyone who has looked closely knows that border taxes do serious collateral damage to US firms that rely on imported materials to manufacture American goods. They can also impose burdensome costs on firms of all sizes caught in a competitive struggle to survive, either against better-protected rivals or in a market made less free and friendly.

With Trump’s promised tariffs now in place, there is real concern about an expanded trade war. But for organizations and groups with the right credentials, the tariff process provides potential relief. Those who anticipate economic pain can petition government trade managers for an exemption. This seems to be widely recognized in the business community. Experience tells us that these requests will keep Trump’s trade office busy.

The politics of tariff adjustments

According to news reports, in Trump’s first term, the Office of the US Trade Representative handled 50,000 exemption requests for Chinese tariffs. The US Department of Commerce received 500,000 requests for exclusions involving steel and aluminum. Such a process would give any president awesome power to reward friends and punish enemies.

Recent research in the Journal of Financial & Quantitative Analysis tells us this is exactly what happened in Trump’s first term. The researchers focused on lobbying activities associated with the tariffs imposed on products imported from China between 2018 and 2020. Using statistical analysis, they examined some $550 billion in imports facing an average 20 percent tariff, including 1,022 cases where exemptions were granted and 5,993 cases that were rejected.

The authors found that campaign contributions and lobbying expenditures matter. As one put it, “Our findings reveal that politicians not only use exemptions to reward their supporters but also withhold exemptions to punish supporters of their opponents. The tariff exemption grant process functioned as a very effective spoils system allowing the administration of the day to reward its political friends and punish its enemies.” 

There was a time when regulatory scholars tried to explain the behavior of politicians and regulators by focusing on a “public interest” theory. It argued that while there might be occasional slip-ups or even corruption, politicians involved in developing and managing regulations are primarily driven by a desire to serve the broad public interest. They simply want to make the world a better place.

In 1971, growth in regulation could no longer be explained by this theory, and Nobel laureate George Stigler offered an alternative theory—an economic one. It said, basically, to keep your eye on the money and you will better predict regulatory outcomes. Whatever the intentions of one politician or another, regulation usually ends up serving highly organized private interests while nominally, if not actually, addressing public-interest concerns.

Trump may believe that high tariffs, with all the potential payoffs and punishments, are what’s best for America. The Tariff Man is nothing if not steadfast. But plans like these are rarely just about what’s best for all Americans taken together. The old public interest theory just doesn’t predict well anymore. Remember, it is the Chinese year of the snake. A snake can shed its skin, but it’s still a snake.

Bootleggers, Baptists—and U.S. Steel?

Citing national security concerns and following an expansive-but-divided Treasury Department review, President Biden denied the $14 billion purchase of U.S. Steel by the Japanese firm Nippon Steel. But both companies sued to overturn the decision.

They aren’t the only losers here. US consumers and other US businesses that purchase steel products will be denied access to what the two manufacturers likely intend to be a more efficiently made, and therefore more affordable, product. Unfortunately, a little-understood political phenomenon is working against us.

The review, conducted by the Committee on Foreign Investment and with participation by the Departments of State and Commerce, Office of the National Security Advisor, and Office of the US Trade Negotiator, ended with a deadlock. While there was no final recommendation, the reviewers gave no indication that the acquisition would pose a national security problem.

Biden apparently disagreed and chose to follow the recommendation of the United Steel Workers leadership, which had ardently opposed the purchase by Nippon since first announced a year ago. Instead of citing his long-celebrated practice of being America’s strongest union-supporting president, he chose to frame the decision as one rooted in the broad public interest.

In an all-too-predictable occurrence among politicians, the president assumed the role of the small-town Baptist in my Bootlegger-Baptist theory of political behavior. In other words, he used language geared toward what’s in our moral or supposed best interests to support a decision that also benefits the financial interests of another group—the parable’s bootleggers. (Historically, both bootleggers and Baptists supported Sunday closing laws that shut down the legal sale of alcoholic drinks but for decidedly different reasons.)

Maybe Biden believes in the national security justification, but one can’t help but notice bootleggers, including perhaps some who speak like our Baptists, coming out of the woodwork.

Along with the steel workers union, which has a financial interest in opposing the deal, there was Cleveland-Cliffs, a rival steel producer that had itself tried to purchase U.S. Steel in 2023 but was outbid by Nippon. Denying the Nippon deal would put Cleveland-Cliffs in a more favorable position.

Also joining the chorus with a combined Bootlegger-Baptist chant were the Sierra Club and other environmental groups. They came out against Nippon’s promise to make major steel-making investments in the decaying U.S. Steel plants, which would mean more steel would be produced in America, along with more pollution.

Thus, President Biden’s incredulous Baptist talk about national security made at least three groups in the coalition happy. But let’s face it: We ordinary citizens tend to fall in line when politicians offer moral justifications for actions that also happen to serve well-organized, influential private interest groups.

Today, our ears ring from repeated Trump and Biden reminders that union-supported tariffs on Chinese, Mexican, and Canadian imports can also help some domestic industries become healthier. While the net benefits of tariffs are dubious, as most economists will tell you, politicians know that claiming the moral high ground will usually persuade enough of their constituents to buy the story.

In the Nippon Steel case, Japanese ownership of highly specialized steel-making machinery under firm US jurisdiction (and staffed by Americans) hardly represents a national security threat. After all, just one hint of trouble and the mill gate locks would be changed and asset confiscation would ensue.

In the end, what we’ve got here is a politically successful regulatory episode wrapped in Baptist clothing. Hans Christian Andersen might even say that our Baptist has no clothes at all.

Yandle’s Reading Table