Unemployment is low, COVID-era disruptions are largely over, and consumers seem to have spending power to keep the party going. The Yahoo Finance Bidenomics Report Card rates the Biden economy an A-, based on a matrix of economic data for first-term presidents going back to Jimmy Carter in the 1970s. Hardly any economists foresee a recession during the next 12 months.
That’s the good news.
On the other side of the ledger, however, are concerns. Trump will face at least three economic challenges during 2025: a possible resurgence of inflation, surprisingly high interest rates, and a gigantic national debt that’s finally starting to vex markets. Trump will also grapple with waning economic dynamism, as a confluence of factors keep GDP growth well below the 3% rate Trump’s incoming Treasury secretary, Scott Bessent, is aiming for.
Trump certainly escaped the worst of inflation, which peaked at 9% in 2022. It’s now down to 2.9%, with shopper sticker shock largely in the past. But the Fed wants inflation at 2%, and the “last mile” of this journey is turning out to be arduous. Inflation was down to 2.4% last September, when the Federal Reserve felt comfortable enough to start cutting short-term interest rates. Inflation has ticked back up since then, and the odds of further Fed rate cuts in 2025 are rapidly declining.
This is one factor fueling the rise in long-term rates such as the 10-year Treasury bond, which in turn sets rates for mortgages and most other consumer and business loans. Long-term rates have actually risen by 1 percentage point since last September, even though the Fed has cut short-term rates by a point since then. Among other things, higher rates are exacerbating the housing affordability problem, one thing that got worse, not better, under Biden.
Another factor pushing long-term rates higher is the $36 trillion national debt, which finally seems to be causing ripples among investors.
Massive amounts of Treasury issuance are raising concerns about how much longer the US government can borrow at current unsustainable levels. Nobody worries that the United States will go broke. But investors perceive more long-term risk than they used to, which pushes rates higher to compensate for the perceived risk. Bond-market wobbles could also interfere with tax cuts and other legislation Trump wants Congress to pass if they add even more to the debt and trigger additional adverse bond-market moves.
Trump has some control over inflation and interest rates. One reason the inflation outlook is worsening: Trump’s plans to impose tariffs on imports and deport migrant workers would be inflationary by pushing costs and prices higher. Consumers and investors are now factoring that into their expectations.
Dylan Smith, chief economist at Rosenberg Research, argues that uncertainty itself is a major factor pushing rates higher.
“That certainty will resolve one way or another,” Smith wrote in a Jan. 16 analysis. “In the next few months, we’ll find out how far the Trump administration plans to go on tariffs and what the response from targeted countries might well be. We’ll also get a sense of whether Congress will be addressing the deficit. That will bring more clarity to bond markets.”
Even if Trump manages to assuage markets, he’ll still face structural challenges likely to keep future economic growth frustratingly low. The United States is an aging society, and the economy becomes less dynamic when fewer young workers support more retirees. That’s one reason the Congressional Budget Office forecasts real annual GDP growth to slow from an average of 2.5% during the last 10 years to about 1.9% during the next 10.
Economist Paul Krugman points out that economic growth comes from two things: growth in the labor force and improvements in productivity. Growth in the US labor force is flattening because of demographic changes. More immigration could boost the labor force, except that Trump wants less immigration, not more.
That leaves productivity gains as the magic bullet, and as Krugman puts it, “Nobody knows how to make a big positive difference.”
Trump and his fellow Republicans insist that tax cuts and deregulation will juice the economy, but there’s no past evidence supporting this. In fact, labor productivity has been higher during times of relatively high taxation and lower during times of lower taxation. Today, labor productivity is middling.
If Trump wants to improve on what Biden has left him, it will probably mean scaling back his protectionist agenda, tackling the national debt, and finding some way other than tax cuts to make American workers more productive.
Bidenomics is now Trumponomics, but the old problems remain.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on Bluesky and X: @rickjnewman.
