Macro Signposts | 22 January 2025
This week, I asked Libby Cantrill, PIMCO's head of public policy, and Allison Boxer, economist, to guest author Macro Signposts and share a high-level outlook for U.S. policy in 2025 along with macroeconomic implications.
The 5 D's of Trump's Second Administration: Key Economic Themes
By Libby Cantrill and Allison Boxer
On Monday, President Donald Trump began his administration with a flurry of actions on immigration, regulation, trade, and more. While uncertainty remains high, we see several overarching economic-related themes for investors coming from Washington this year.
The new administration's policies could be a mixed bag for the economy - some will be positive for animal spirits and growth, while others could hinder growth and market sentiment or limit progress on inflation. The cumulative impact for both 2025 and 2026 will largely depend on the scope and sequencing of the policies, and how markets and other countries respond.
In our baseline U.S. outlook - where tax cuts are extended, tariffs are increased, and spending cuts are modest - we expect the fiscal growth impulse (i.e., the impact on growth from policy changes) to be modestly negative to flat this year, while inflation is modestly higher, and the Federal Reserve can remain focused on gradually normalizing policy over time. (Read more about the U.S. and global economies in our latest Cyclical Outlook, "Uncertainty Is Certain.")
The key themes - we call them the "five D's" of the second Trump administration, in no particular order - are deglobalization, deficit-financed tax cuts, DOGE, deportation, and deregulation.
1) Deglobalization
Similar to Trump 1.0, we expect Trump 2.0 to focus on an "America First" policy, particularly as it relates to trade. This will likely include tariffs, export controls, and more scrutiny - if not outright prohibitions - on capital investment, all of which Trump 2.0 can more or less do without Congress.
We expect some announcements during Trump's early days in office to underscore his seriousness about tariffs. On Day 1, he directed his cabinet secretaries to investigate and "recommend appropriate measures" to address the trade deficit in goods. While this was far from the kinds of severe actions (e.g., a universal 10% tariff) that many observers thought could happen on Day 1, we would caution investors not to read too much into it: Trump believes tariffs work, on their own or as negotiating tactics, and we expect to hear much more from Trump on trade policy. Specific to Mexico and Canada - areas of immediate concern to many investors - sector-based tariffs may be more likely than broad-based, though it is ultimately Trump's decision.
What are the likely macro effects? While many investors have focused on the potential for tariffs to raise prices - both for finished goods imported and sold to consumers directly, as well as for intermediate goods used by U.S. producers - we believe tariffs would also likely have negative growth effects, at least in the short run. In our baseline outlook, we expect modestly higher core inflation of around 20 to 40 basis points in the U.S. in 2025. The negative growth effects would likely be of a similar size; however, the impact will vary significantly depending on several factors:
One clear winner from tariffs? The U.S. deficit: It could decline as customs revenue, currently around $100 billion per year, stands to rise significantly depending on the ultimate composition of tariffs.
2) Deficit-financed tax cuts
A significant focus on Capitol Hill this year will be addressing the expiring 2017 Tax Cuts and Jobs Act. If there is no action on this, then around $4.2 trillion in tax cuts over 10 years, largely on the individual side, would expire at the end of 2025. Trump has also discussed passing additional tax cuts, such as no taxes on tips, a state and local tax (SALT) cap increase from the current $10,000 limit, and a corporate tax cut for "Made in America" companies.
What are the likely macro effects? The biggest impact of tax cuts is likely to be on the deficit. There are a lot of outstanding questions about how the tax bill will be structured - will tax cuts only be extended for four or five years to reduce the cost of the bill and be paired with pay-fors that increase revenue over 10 years, or will some of the louder voices who believe that tax cuts do not need to be paid for prevail? Regardless of the ultimate details, we believe tax cuts will likely add to the deficit over the long run.
However, while the price tag of many of these proposals is large, we expect there to be a positive, but limited, impact on growth in 2026. Most of the focus is on extending tax cuts that are set to expire at the end of 2025, and keeping tax rates unchanged would have no effect on growth. Some of the other tax policy changes on the table could provide modest tailwinds, as will reduced tax policy uncertainty, but we do not expect further tax cuts to significantly change the macro outlook.
Bigger picture: While the long-term outlook for U.S. government debt is likely to remain a significant concern, some near-term deficit improvement seems possible given potential tax policy, spending cuts, and higher tariffs that boost government revenue.
3) DOGE: the Department of Government Efficiency
DOGE seeks to use technology to address inefficiencies across the U.S. government. Although the Day 1 executive order to establish DOGE made no mention of spending, DOGE's original purpose included recommending spending cuts as well as boosting efficiency. Keep in mind that except for some small discretion around when outlays are allocated, the potential use of an esoteric tool called "impoundment," and potentially imposing restrictions on how states spend healthcare funds, the executive branch has little ability to cut spending itself; any significant spending cuts will have to go through Congress.
Our view is that (with or without help from DOGE) we are very likely to see some spending cuts passed as part of a broad reconciliation bill in addition to the rollback of some elements of the Inflation Reduction Act (IRA). The increase in net revenues could range from $100 billion to $200-plus billion per year. Much more than that would be asking a lot given the skinny House Republican majority.
What are the likely macro effects? We think at least some of this reduced spending would be spent passing new tax cuts, so it is unlikely to directly reduce the deficit, although it could help reduce the increase in the deficit. At the same time, Trump said nothing about deficits or debt in his inaugural address, and spending cuts may be harder to pass in a small House majority than some observers expect.
4) Deportation
We expect immigration to be center stage under Trump 2.0. Indeed, one of the Day 1 executive orders was again declaring a national emergency at the southern border. We think many of the initial actions (such as restricting asylum applications) will be focused on stopping the flow of migrants. However, President Biden's actions at the southern border in June 2024 have already significantly slowed the number of migrant crossings relative to the 2023 peak. While we could see Trump try to close the border completely, he is also likely to focus on deportation, but there he will likely need Congress to provide funding for more broad-based actions.
What are the likely macro effects? Most economists believe that growth would see a more immediate negative effect from the restriction of immigration since immigrants start consuming (food, shelter, etc.) immediately when they come into the country. Much of the growth headwind is likely baked in to the 2025 outlook already (given how Biden's policies have decreased immigration), so the bigger impact could be in 2026 should we see a broader deportation program.
The inflation impacts would tend to be more mixed. Reduced labor supply could put upward pressure on wages, and we expect decreased immigration to help lower the unemployment rate this year (all else equal). However, we also think that slower immigration could reduce inflation in areas such as shelter, resulting in inflationary effects that are more ambiguous overall.
5) Deregulation
Similar to 2017, we saw a slew of executive orders on Day 1 of Trump 2.0 aimed at reducing regulation. Many of these orders seek to undo what Biden has done - similar to how Biden undid what Trump did. We expect the second Trump administration will also seek to roll back existing regulations. This would likely be more evolutionary than revolutionary, but it probably would involve a much lighter touch on enforcement. We think an obvious focus will be on financial regulation (including the Consumer Financial Protection Bureau (CFPB) and the Fed) as well as energy and climate-related restrictions. Indeed, in his inaugural address, Trump declared a national energy emergency and declared, "Drill, baby, drill."
What are the likely macro effects? We may see a modest growth tailwind from reduced policy uncertainty as well as improved animal spirits and sentiment. Survey-based economic indicators show early signs of greater policy certainty supporting U.S. hiring.
Bottom line for markets, the economy, and the Fed
There are more questions than answers as to how the five D's will ultimately affect the broader economy: Much will depend on their scope and timing, as well as responses by other countries and the markets. Overall, we may see some broadly positive policies for growth and risk markets, and others that could give the markets indigestion. Our baseline anticipates policies that are flat to modestly negative for growth in the short run, while pressuring inflation modestly higher.
Given the views on growth and inflation in this baseline would apply opposing pressure on the Fed's dual mandate to support maximum employment (growth) and stable prices, how will monetary policymakers react? Even with higher tariffs, we think the risk is tilted toward more rate cuts in 2025 than markets currently have priced in, not less, for several reasons.
First, Fed analysis (released in 2018) on the impact of tariffs in Trump 1.0 was consistent with our view that Fed officials are likely to look through the one-time price level adjustment from tariffs, absent a move higher in inflation expectations. Second, more disruptive tariff policy than our baseline (for example, large across-the-board tariffs on Mexico and Canada) risks nonlinear negative effects on growth in the short run. Along these lines, former Fed Governor (and Trump appointee) Randal Quarles recently argued that larger tariffs could cause the Fed to lower rates more than it otherwise would, despite tariffs' tendency to raise prices. Third, we believe Fed officials would need to see higher prices from tariffs drive inflation expectations meaningfully higher, thus risking a more permanent shift higher in inflation, before they started to react. This is something we did not see throughout the high inflation period during the pandemic. In other words, we still think the bar for Fed rate hikes is high.
Catch up on recent editions of Macro Signposts:
Macro Signposts highlights weekly takeaways from the data analysis conducted by our team of economists and other macro experts. For PIMCO's official views on the global economy, please visit pimco.com.
We welcome your questions about the global macro landscape. Don't hesitate to suggest themes or data for us to analyze and discuss: Please email [email protected].
For regular insights on U.S. policy via email, please sign up here to receive PIMCO Washington Watch from Libby Cantrill, head of public policy.
All investments contain risk and may lose value.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517, 11 Baker Street, London W1U 3AH, United Kingdom) is authorised and regulated by the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. Since PIMCO Europe Ltd services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. | PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963, via Turati nn. 25/27 (angolo via Cavalieri n. 4), 20121 Milano, Italy), PIMCO Europe GmbH Irish Branch (Company No. 909462, 57B Harcourt Street Dublin D02 F721, Ireland), PIMCO Europe GmbH UK Branch (Company No. FC037712, 11 Baker Street, London W1U 3AH, UK), PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E, Paseo de la Castellana 43, Oficina 05-111, 28046 Madrid, Spain) and PIMCO Europe GmbH French Branch (Company No. 918745621 R.C.S. Paris, 50-52 Boulevard Haussmann, 75009 Paris, France) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 15 of the German Securities Institutions Act (WpIG). The Italian Branch, Irish Branch, UK Branch, Spanish Branch and French Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) (Giovanni Battista Martini, 3 - 00198 Rome) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland (New Wapping Street, North Wall Quay, Dublin 1 D01 F7X3) in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority (FCA) (12 Endeavour Square, London E20 1JN); (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) (Edison, 4, 28006 Madrid) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively and (5) French Branch: ACPR/Banque de France (4 Place de Budapest, CS 92459, 75436 Paris Cedex 09) in accordance with Art. 35 of Directive 2014/65/EU on markets in financial instruments and under the surveillance of ACPR and AMF. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. According to Art. 56 of Regulation (EU) 565/2017, an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO Europe GMBH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2, Brandschenkestrasse 41 Zurich 8002, Switzerland). According to the Swiss Collective Investment Schemes Act of 23 June 2006 ("CISA"), an investment company is entitled to assume that professional clients possess the necessary knowledge and experience to understand the risks associated with the relevant investment services or transactions. Since PIMCO (Schweiz) GmbH services and products are provided exclusively to professional clients, the appropriateness of such is always affirmed. The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (8 Marina View, #30-01, Asia Square Tower 1, Singapore 018960, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Investment Management (Shanghai) Limited. Office address: Suite 7204, Shanghai Tower, 479 Lujiazui Ring Road, Pudong, Shanghai 200120, China (Unified social credit code: 91310115MA1K41MU72) is registered with Asset Management Association of China as Private Fund Manager (Registration No. P1071502, Type: Other). | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. To the extent it involves Pacific Investment Management Co LLC (PIMCO LLC) providing financial services to wholesale clients, PIMCO LLC is exempt from the requirement to hold an Australian financial services licence in respect of financial services provided to wholesale clients in Australia. PIMCO LLC is regulated by the Securities and Exchange Commission under US laws, which differ from Australian laws. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association, The Investment Trusts Association, Japan and Type II Financial Instruments Firms Association. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is an independently operated and managed company. The reference number of business license of the company approved by the competent authority is (112) Jin Guan Tou Gu Xin Zi No. 015. The registered address of the company is 40F., No.68, Sec. 5, Zhongxiao East Rd., Xinyi District, Taipei City 110, Taiwan (R.O.C.), and the telephone number is +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | Note to Readers in Colombia: This document is provided through the representative office of Pacific Investment Management Company LLC located at Carrera 7 No. 71-52 TB Piso 9, Bogota D.C. (Promoción y oferta de los negocios y servicios del mercado de valores por parte de Pacific Investment Management Company LLC, representada en Colombia.). Note to Readers in Brazil: PIMCO Latin America Administradora de Carteiras Ltda.Av. Brg. Faria Lima, 3477 Itaim Bibi, São Paulo - SP 04538-132 Brazil. Note to Readers in Argentina: This document may be provided through the representative office of PIMCO Global Advisors LLC AVENIDA CORRIENTES, 299, Buenos Aires, Argentina. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America LLC in the United States and throughout the world. ©2025, PIMCO.
CMR2025-0121-4176690