Is Trump’s fiscal daredevilry a ticking time bomb for the US economy?

US President Donald Trump has promised to make America great again, but he appears to be unleashing a ticking time bomb on the US economy.

Trump’s economic and trade policies, comprising tariffs, dismantling of the federal government, and tax cuts, have the potential to create ‘stagflation’ in the United States, a complex phenomenon where stagnant economic growth and high unemployment coexist with persistent inflation.

In the wake of
Trump’s continuing announcements regarding tariffs, credit rating Moody’s and economists have warned that the resilience of the US economy is not certain and a recession is a real possibility.

In an analysis this week, Moody’s said the US “fiscal strength is on course for a continued multiyear decline”, having already “deteriorated further” since the credit rating agency assigned a negative outlook to US AAA credit rating in November 2023.

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Trump himself has
refused to rule out the possibility of a recession. When asked if he could rule out the chance of recession in an interview earlier this month, he said: “I hate to predict things like that. There is a period of transition because what we’re doing is very big. We’re bringing wealth back to America. That’s a big thing. And there are always periods of it takes a little time.”

Moody’s flashes warning signal for US economy

In an analysis this week, Moody’s warned that Trump’s tariff policy would “weigh on business investment, dampen consumer confidence, and prevent the Fed from reducing interest rates”.

Even though the United States remains resilent in the sense that the US dollar is the world’s dominant reserve currency and there is “exceptionally” high demand for US Treasury debt, Moody’s said that such even such positive factors are unlikely to manage the fallout of policies that Trump has put in place.

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“The potential negative credit impact of sustained high tariffs, unfunded tax cuts, and significant tail risks to the economy have diminished prospects that these formidable strengths will continue to offset widening fiscal deficits and declining debt affordability. In fact, fiscal weakening will likely persist even in very favourable economic and financial scenarios,” warned Moody’s.

Staflation looms on the horizon — thanks to Trump

The United States is not just staring at a real risk of inflation but something worse known as ‘stagflation’. It is a condition where recession and inflation coexist in a complex set of conditions.

In stagflation, the economic growth remains low with high unemployment as is the case in recession, but prices remain high as is the case in inflation. It is hard to tackle as typical measures to combat inflation, such as raising interest rates, can further slow down growth and worsen the crises and stimulus to stir growth may increase worsen inflation.

As a result of Trump’s policies, both inflationary and recessionary markers are set to be strengthened, laying the perfect groundwork for stagflation.

As a result of tariffs, inflation is set to rise as
importers are set to pass increased costs to consumers. Such inflation, coupled with a slowing economy and falling consumer sentiment that is at a four-year low, is set to fuel chaces of stagflation.

Moreover, Trump’s deportations and firings of government employees are expected to make the largest addition to US unemployment numbers in history. The unemployment, coupled with slowdown in food and construction industries that depend massively on migrants, is expected to further slow down the economy, fuelling chances of stagflation.

As per an analysis by UCLA Anderson Forecast’s economist Clement Bohr, Elon Musk is set to fire nearly a million people directly or indirectly, making the movement the single largest layoff in US history.

Last week, Chicago Fed President Austan Goolsbee told CNBC that there already exists an stagflationary impulse.

“There is nothing more uncomfortable than the stagflationary environment…where both sides of the mandate start going wrong. There is not a generic answer…Which is worse? Is it bigger on the inflation side? Is it bigger on the job market side? Higher tariffs raise prices and reduce output so that is a stagflationary impulse,” said Goolsbee.

Separately, RSM chief economist Joe Brusuelas said in an analysis carried by Reuters that policymakers’ forecasts “implied mild stagflation ahead in the near term as growth slows and inflation increases”, noting the “pervasive uncertainty around the size and magnitude of the trade shock”.