The US economy is showing the first signs of stress under President Trump’s aggressive push to shrink federal spending, impose tariffs, and overhaul government operations.
Trump on Thursday announced that 25% tariffs on imports from Mexico and Canada will go into effect on March 4, following a one-month delay.
The tariffs on Mexico and Canada were initially paused on February 3
However, businesses and local governments have already started struggling to adjust to sudden policy shifts, fuelling economic uncertainty that is beginning to take a toll on investment and consumer confidence.
While Trump’s administration argues that these measures will strengthen the economy in the long run, the early impact has been disruptive, according to a report by The New York Times.
Recent surveys show growing anxiety among business leaders, with many putting expansion plans on hold.
States and municipalities, meanwhile, are bracing for budget shortfalls as federal funds dry up, forcing them to explore new taxes and municipal bonds to stay afloat.
“There’s more uncertainty than I think is widely appreciated,” said Michael Strain, an economist at the conservative American Enterprise Institute in the report.
All the uncertainty around trade policy, uncertainty around some of the things that the Department of Government Efficiency is doing, I think will have a chilling effect on investment plans and expansion plans.
Job cuts by DOGE and spending freezes shake economic confidence
The Department of Government Efficiency, led by Elon Musk, has launched sweeping layoffs across federal agencies, part of a broader effort to streamline government operations.
The cost-cutting measures are already being felt nationwide, with thousands of job losses across various departments, prompting concerns about a wider economic slowdown.
“Dozens of Alaskans — potentially over 100 in total — are being fired as part of the Trump administration’s reduction-in-force order for the federal government,” Senator Lisa Murkowski, Republican from Alaska, wrote on X.
Many of these abrupt terminations will do more harm than good, stunting opportunities in Alaska and leaving holes in our communities.
In addition to layoffs, the administration has frozen funding for several federal programs, including foreign aid initiatives that benefited US farmers.
Billions of dollars in climate and infrastructure projects initiated under President Biden are also in limbo.
Economic surveys suggest that these policy moves are already weighing on business sentiment.
A measure of corporate activity from S&P Global recorded a slowdown in US business expansion in February, citing uncertainty surrounding new government policies.
The National Association of Homebuilders also reported a decline in builder confidence, pointing to concerns over tariffs and rising mortgage rates.
Trump’s tariffs spark fears of higher inflation and trade wars
Trump’s decision to impose tariffs on key trading partners has triggered fears of inflation and economic retaliation.
The administration recently enacted a 10% tariff on Chinese imports and came close to levying a 25% tariff on goods from Canada and Mexico before offering a temporary reprieve.
Higher “reciprocal” tariffs on cars, semiconductors, and steel are also under consideration.
These measures have already had a chilling effect on business investment. Companies that rely on global supply chains are reevaluating expansion plans, while manufacturers warn that increased costs could be passed on to consumers.
A survey by the Conference Board recorded its steepest monthly decline in consumer confidence since 2021, attributing the drop to concerns over job security and rising prices.
Meanwhile, Morgan Stanley economists estimate that Trump’s tariffs could increase inflation by up to 0.6 percentage points and reduce consumer spending by as much as two percentage points.
States and cities scramble to offset federal cuts
With Washington pulling back financial support, state and local governments are facing difficult choices.
Many are now considering tax hikes or issuing bonds to plug funding gaps left by federal spending cuts.
“To go from $350 billion to nothing, that’s a pretty impressive difference,” said Emily Brock, director of the Federal Liaison Center at the Government Finance Officers Association.
I think that state and local governments are going to have to think creatively about a lot of different things.
In Pennsylvania, Governor Josh Shapiro took the Trump administration to court over $2.1 billion in frozen federal funds meant for mine safety and environmental cleanup programs.
Although the money was eventually restored, the episode underscored the volatility local governments face.
“The federal government entered into agreements with state government agencies to get those dollars out into people’s communities,” Shapiro said this week.
“Those agreements are binding. To put it simply: A deal is a deal.”
Similar struggles are playing out across the country, with infrastructure projects stalled and local officials scrambling to secure alternative funding sources.
The Federal Reserve weighs risks of slower growth and higher inflation
As economic uncertainty mounts, the Federal Reserve faces a difficult balancing act.
Inflationary pressures from tariffs are rising, but concerns about slowing growth may complicate the central bank’s policy decisions.
Minutes from the Fed’s latest meeting suggest that officials remain cautious about cutting interest rates in the near future, citing persistent inflation risks.
Investors, hoping for relief, are growing anxious about the potential for prolonged high borrowing costs.
Stock markets have already responded to the shifting economic landscape, with major indices posting declines amid fears of weaker growth.
Larry Kudlow, a former Trump economic adviser and Fox Business host, acknowledged that tariffs could push inflation higher, even as he defended the administration’s broader economic strategy.
“At least for now, the economic signals are flashing slower growth and higher inflation,” Kudlow said.
The road ahead: uncertainty and political backlash
Despite the economic turbulence, the Trump administration remains firm in its approach, arguing that any short-term pain will be offset by long-term gains.
Treasury Secretary Scott Bessent defended the spending cuts and regulatory rollbacks as necessary corrections after what he described as excessive government intervention during the Biden years.
“We have seen what I would call this orgiastic government spending with the past administration,” Bessent said.
“And we’re going to bring that down.”
Still, opposition to the administration’s policies is growing. Protests against federal job cuts have erupted at town hall meetings, and even some Republican lawmakers have expressed concerns about the potential fallout for their states.
With the US economy at a crossroads, the coming months will test whether Trump’s policies can deliver on their promises—or whether the early warning signs of strain will escalate into broader economic troubles.
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