Trump’s plans to impose massive tariffs and deport millions of immigrants who lack permanent legal status are likely to reignite inflation and dampen economic growth, according to forecasters. Yet his pledge to extend and expand the sweeping tax cuts passed in his first term and ease the regulatory burden on businesses could juice the economy and have mixed effects on inflation.
So, which of the incoming administration’s contrasting policy agendas is likely to move the needle for the economy this year?
"The only certainty is uncertainty," said Ryan Sweet, chief U.S. economist of Oxford Economics.
"If the focus is more on deregulation, tax cuts and potential sweeteners than changes to tariffs and immigration, then growth could be much stronger in 2025," Diane Swonk, chief economist of KMPG U.S., wrote in a report. "Otherwise, risks are for higher inflation and weaker expansion."
Generally, forecasters see 2025 as a transition year as the economy continues its post-pandemic recovery but at a lower temperature before Trump’s policies fully take effect. For workers, healthy wage growth is likely to keep outpacing slowing inflation, fueling consumer spending and job gains. The Federal Reserve’s interest rate cuts, which began in 2024 and are set to continue this year assuming inflation eases further, should provide a boost to growth.
Meanwhile, Trump is likely to rein in the scope of the tariffs and deportations he promised on the campaign trail, some economists say. And the programs likely will take months to ramp up, delaying their toll on the economy and inflation until the second half of the year.
Instead of the recession Moody’s Analytics forecast a few months ago, the research firm now foresees a more slowly growing economy in 2025.
"The economy is in a good place and consumers will again do their part to drive the economic train," Moody’s Chief Economist Mark Zandi said. But, he added: "It won’t grow as much as it should because of economic policy."
During the campaign, Trump vowed to impose 60% tariffs on Chinese imports and 10% levies on shipments from all other countries to prod manufacturers to move production back to the U.S. Recently, he threatened 25% tariffs on Canada and Mexico and 10% fees on China to pressure the countries to curtail the flow of illegal drugs and unauthorized immigration to the U.S.
Ultimately, Zandi figures Trump will hit China with 20% tariffs while Sweet is looking for 30% duties. The economists also expect smaller levies on Canada, Mexico, and parts of Europe as well as Asian nations such as Vietnam and Japan that could serve as alternative production sources to China.
Trump is sensitive to the performance of the economy and stock market and is likely to soften the tariffs if they hammer those closely-watched gauges, Zandi and Sweet said.
Trump will also probably moderate his immigration strategy since deporting up to 11 million migrants who lack permanent legal status would be a logistical nightmare, the economists said.
Zandi expects about 500,000 deportations per year, along with tougher constraints on border crossings, lowering annual net immigration to about 700,000 from an average 2.5 million a year during President’s Joe Biden term and 1.2 million historically.
By contrast, tax cuts likely won’t stoke growth until 2026 since the tax reform Trump spearheaded in his first term expires at the end of 2025, Sweet and Zandi said.
Later this year, Trump and a Republican Congress are expected to extend lower tax rates for all income levels, and possibly increase immediate write-offs for business capital investments, and lower the corporate tax rate from 21% to 15%.
Trump also could loosen regulations for the oil and gas industry, banks, and tech companies as early as this year but mostly in 2026, spurring more investment, Sweet said. However, opening more federal land to oil drilling may do little to reduce gasoline prices.
Already, the stock market and small business confidence have leaped since Trump’s election, possibly triggering more investment and hiring as early as 2025, the economists said.
What’s the bottom line?
Economists predict the economy will grow a solid 2.1% this year, down from an estimated 2.7% in 2024, according to the average forecast of those surveyed by Wolters Kluwer Blue Chip Economic Indicators. Sturdy gains in the first half should give way to a weaker showing later in the year as tariffs and immigration limits take effect, Zandi said. He estimates those policies will reduce economic growth by about half a percentage point.
In 2026, Zandi figures the negative effects of tariffs and an immigration crackdown for a full year will more than offset the positive bump from tax cuts and deregulation, helping push down growth to 1.6%. Sweet has the opposite view, reckoning favorable tax and regulatory policy will power the economy to a 2.7% gain next year.
Here’s a closer look at how key parts of the economy could perform in 2025.
The Fed’s preferred measure of annual inflation overall has eased from a 40-year high of 7.1 % in early 2022 to 2.4% in November due mostly to the resolution of pandemic-related supply chain snarls and labor shortages that pushed up wages.
That pullback is likely to continue as pay increases slow further and spikes in service prices, such as rent and auto insurance, pull back, JPMorgan Chase economist Michael Feroli wrote in a research note.
But U.S. manufacturers, retailers, and other companies socked with import tariffs are expected to pass most of those costs to consumers through higher prices, Zandi and Sweet said. And less immigration will likely mean a smaller labor supply that should keep wage growth elevated, the forecasters said. Companies could pass their higher labor costs to consumers.
As a result, after edging down through the first half of 2025, Zandi estimates yearly inflation will climb back to 2.4% by December. Inflation, he projects, won’t return to the Fed’s 2% target until 2029.
But Feroli doesn’t believe Trump’s harsher immigration stance will have a notable effect on prices. He expects inflation to fall to 2.2% this year.
For two years, inflation outpaced wage growth, leaving many Americans struggling to make ends meet. Since May 2023, that dynamic has flipped, giving consumers more purchasing power. In November, while overall prices increased 2.4% from a year earlier, average hourly wages grew 4%, government figures show.
That’s largely expected to continue this year, helping support consumption, which makes up about 70% of economic activity. Strong growth in productivity – or output per worker – could allow employers to maintain 4% pay increases without raising prices as sharply, the economists said.
But most of the spending gains will come from higher-income households, which have benefitted from rising stock and home prices, Zandi and Sweet said. Low- to middle-income people will continue to struggle with record credit card debt and high delinquencies, though lower interest rates should ease their burden somewhat, Zandi said.
Yet by raising prices, tariffs will reduce consumers’ buying power and purchases, he said. And less immigration means losing the spending of migrants who have bolstered consumption.
All told, economists estimate consumer spending will increase a healthy 2.4% this year, down from an estimated 2.6% in 2024, according to those surveyed. Consumption would be about a half point higher if not for the tariffs and immigration curbs, Zandi said.
Average monthly job growth is projected to slow from about 173,000 this past fall to 100,000 by the end of the year, Moody’s estimates. A wave of catch-up hiring following massive layoffs early in the pandemic has run its course, Feroli said.
And less consumer spending means businesses won’t need as many workers.
The labor force ‒ the pool of Americans working and looking for jobs ‒ is likely to grow even more slowly because of the immigration restraints, Zandi said. In other words, many businesses again could struggle to find workers, especially in industries that rely heavily on immigrants, such as restaurants, hotels, construction, and agriculture, Moody’s said in a report.
Zandi expects the labor force to grow 0.5% a year during Trump’s term, down from 2% in recent years.
At the same time, many federal workers could lose jobs if Trump follows through on hiring freezes and furloughs, said Moody’s economist Dante DeAntonio.
Economists surveyed by Wolters Kluwer expect the average unemployment rate to rise to a still-low 4.3% in 2025 from 4% last year.
Businesses will face conflicting forces.
Extending the tax cuts and easing regulations should combine with lower borrowing costs to boost capital spending, Sweet said. And a recent factory building boom spawned by federal subsidies for chip and clean-energy production should spur purchases of equipment to fill the plants, he and Zandi said.
At the same time, the uncertainty generated by the tariff and immigration policies could slow business outlays, Zandi said.
All told, business investment is projected to grow a solid 2.8%, down from an estimated 3.9% in 2024, according to the Wolters Kluwer survey.
After lowering their key interest rate by a percentage point since September, Fed officials revised their median forecast from four quarter-point cuts to just two this year. Fed Chair Jerome Powell said some officials may have factored in an inflation bump caused by the tariff and immigration plans.
Fewer rate cuts would mean less juice for a slowing economy.
This article originally appeared on USA TODAY: Economy set for a strong 2025. But some Trump plans could slow growth
