Overview
Over a year into Donald Trump’s second presidential term, the administration’s broad economic program has produced results that are both notable and incomplete. Policies ranging from tax cuts and import tariffs to a tightened immigration approach and deregulation have reshaped the contours of U.S. economic performance. The outcome is a mixed picture: robust GDP growth and a surge in private investment in artificial intelligence sit alongside slower job gains, persistent inflationary pressures and a legal reversal on a core trade policy tool.
Growth outperforms expectations
After a sluggish start to last year, when businesses accelerated imports to avoid new levies and the economy contracted, growth picked up markedly. A record-long government shutdown trimmed government spending and damped activity late in the year, but in the intervening months growth exceeded consensus expectations. Economists and market participants point to several drivers: the tax cuts enacted under the administration’s One Big Beautiful Bill, stronger consumer spending and a wave of investment in artificial intelligence that has boosted capital formation.
Those tax cuts are expected to continue supporting expansion this year, assuming other factors remain unchanged. Investment in AI has been singled out as a particularly important contributor to output gains, even as household spending remains a major underpinning of the expansion.
Tariffs, trade flows and revenue
Tariffs have been a central element of the administration’s economic toolbox. Prior to enactment of sweeping levies, many firms pulled forward imports to beat the new charges, a pattern that temporarily widened the U.S. trade deficit rather than narrowing it. While some analysts believe tariffs could eventually reduce the gap between imports and exports, the contraction in the deficit Trump has sought has not yet materialized.
Complicating the policy picture, the Supreme Court invalidated the administration’s broad "emergency" global tariffs, removing a linchpin of the trade program. In response, the administration has implemented a fresh 15% tariff intended to partially replace the struck-down measures and has signaled plans to use a variety of authorities to preserve import-levy revenue streams.
Manufacturing: output up, employment down
Manufacturing has shown resilience. Despite the combination of higher import levies and elevated borrowing costs, industrial output has climbed, supported in part by the wave of AI-related investment. Analysts suggest the trend could continue and spread across more sectors as the tax cuts feed through the economy.
Yet this rise in factory output has not translated into stronger employment in the sector. During the president’s second term, factory jobs have declined, undercutting administration goals to restore manufacturing employment through trade and tariff policy. The disconnect between rising output and falling payrolls underscores the role of productivity gains, automation and capital-intensive investment in shaping manufacturing’s employment footprint.
Labor market stalls
On the broader labor market front, unemployment has inched higher but remains relatively low at 4.3% in January. Still, monthly job creation slowed significantly last year. For the entire year, payrolls rose by 180,000, a total only marginally greater than the 168,000 average monthly job gain recorded in 2024. Analysts attribute much of the slowing to the administration’s immigration crackdown, which reduced the supply of workers and in some cases the demand for labor.
January saw employers add 130,000 jobs, a stronger monthly figure, but observers caution that it is uncertain whether that pace will persist.
Inflation and affordability pressures persist
Inflation remains a central concern. Although price growth has moderated from the post-pandemic surge experienced under the prior administration, the Federal Reserve’s preferred inflation gauge was trending upward late in the year. Forecasters expect that trend to hold for a few more months as last year’s tariffs continue to ripple through prices.
On housing and affordability, government efforts announced late last year aim to ease strain, but higher mortgage rates and a limited housing supply across many regions continue to put homeownership out of reach for families without incomes well above the median.
Monetary policy outlook
The administration has nominated former Federal Reserve Governor Kevin Warsh to replace Jerome Powell as Fed chair in May. Financial markets are pricing in the expectation that inflation will have moderated by the time of the leadership change and that Warsh could preside over interest-rate reductions starting in June. Those rate cuts are also seen as contingent on further softening in labor market conditions.
Bottom line
The first year-plus of the administration’s second term has produced a mixed set of economic outcomes. Tax cuts and a surge in AI investment have supported unexpectedly strong growth, while tariffs and regulatory changes have reshaped trade flows and industrial incentives. Yet legal reversals on trade policy, the failure of rising manufacturing output to generate jobs, tepid job creation overall and persistent affordability and inflation pressures underline the unevenness of the economic picture.
Key points
- GDP growth exceeded expectations, driven by One Big Beautiful Bill tax cuts, strong consumer spending and significant investment in AI.
- Tariff policy has been disrupted by a Supreme Court ruling, but the administration has imposed new 15% tariffs to preserve import levy revenue.
- Manufacturing output has risen even as factory employment has declined; unemployment edged up to 4.3% in January and overall job gains slowed last year.
Risks and uncertainties
- The legal overturning of emergency tariffs introduces uncertainty for trade policy and sectors dependent on import protection, including domestic manufacturing and logistics.
- Inflationary pressures remain, with the Fed’s preferred gauge trending up late in the year and tariff effects expected to persist for several months, affecting consumer-facing sectors and housing affordability.
- The slowdown in job creation, linked in part to immigration policy, creates downside risk for consumer spending and sectors that rely on labor availability, such as construction and services.