How Trump's budget bill & tax cuts would impact the US economy

00:00 Speaker A

Markets still digesting the latest credit downgrade from Moody’s and a looming House vote on deck for President Trump’s tax bill. Here to help us break it all down is City Economist Veronica Clark. Veronica, great to see you. Maybe we’ll start on on that Trump tax bill. You know, the president was was on Capitol Hill today, Veronica, kind of rallying Republican lawmakers trying to behind his agenda. Those Trump tax cuts. If they get extended, Veronica, walk us through as an economist how how you would see that, how you’d model that, its impact on the US economy.

00:48 Veronica Clark

Yeah, yeah, absolutely. Obviously, still a lot of moving parts. This has to pass through the house and then the Senate will take over and probably make some changes. Um, but the first way that we think about the economic impact is really just look at what does it do to changes in the deficit. Um, of course, the deficit has been pretty wide for the last couple years, we’re around 6% or so of GDP. Um, and this bill looks like it will keep that maybe around flat. Um, maybe if anything deficits could be slightly wider, that would be more expansionary fiscal policy. Um, but overall we’re expecting pretty much flat, still, of course, very wide deficits, but for growth, that means a pretty flat impulse. So

01:35 Speaker A

And Veronica, at what point do those deficits, and and perhaps more importantly, servicing the debt, for example, at what point does that become an economic problem or does it not as long as foreigners keep buying the debt?

02:07 Veronica Clark

Yeah, I think in the in the near term, you know, it is is sustainable enough as long as there are people willing to buy. Of course, yields are are relatively high, so maybe it isn’t attractive buy. Um, but yeah, we would get of course increasingly worried. And the yield issue is is part of that, you know, debt servicing costs, interest expense, um, is going to be an increasing part of of this deficit. Um, and yeah, at some point you you do worry about that, and we don’t really know when that bites, unfortunately.

02:58 Speaker A

Veronica, switching gears, I also want to get your thought on tariffs. Obviously, lot of dimensions to that policy tool. As an economist, how are you thinking through, Veronica, its impact, for example, on inflation?

03:20 Veronica Clark

Yeah, absolutely. You know, we did have last week the the delay of the substantial tariffs on on China. Now 145%, you know, as of a couple weeks ago, that was prohibitive for for trade essentially. Um, and now the tariff increase on China is something around 30%, which is doable, but it’s it’s still large. Um, that is still something that probably gets passed on to consumer prices, maybe not quite as much as we were expecting. Um, but right now, you know, the Fed’s preferred inflation measure is hanging out around 2.5%, that’s core PCE inflation. We think by the end of the year that could look something closer to 3%. Um, and maybe we start to see that in in consumer prices as we get to the late summer, early fall. Um, we haven’t seen it so much yet in in some of the inflation data we got last week.

04:30 Speaker A

With those tariffs, Veronica, let’s say to your point, let’s say companies decide, you know, we’ll eat some of these costs, but we’re going to have to pass some of them along. Is the American consumer in the financial position right now, Veronica, to shoulder those costs?

05:00 Veronica Clark

Yeah, I think there were a lot of signs before we got to, you know, the tariffs, the risks for this year, um, that the consumer was weakening. You know, consumption could be slowing. Um, it’s held up pretty well. Of course, consumer spending has been a big driver of the economic strength the last couple years. Um, but I think that’s reflecting that, you know, layoffs are still low, the labor market has been healthy enough. Um, if something changes that, which, you know, tariffs could be a factor in maybe seeing some layoffs later in the year. Um, then this does look like a really vulnerable consumer. Savings rates are very low, delinquencies are are pretty high. Um, you know, debt repayments, we’re having student loan repayments starting soon. Um, all of that could could weigh on consumption.

06:03 Speaker A

And Veronica, the the Fed folks that we’ve heard from, I’m speaking today, Bostic, Mussalam, both kind of saying, uh, we still have to wait. We don’t know what effect the tariffs are going to have on inflation or on, um, consumer behavior. I also saw a headline from Ray Dalio speaking at a conference today, Bridgewater founder, saying the Fed’s in a difficult position and shouldn’t cut rates. Is the Fed effectively frozen here for the near term?

06:54 Veronica Clark

I think for the very near term, yeah, yeah, I think we’re all a little frozen. We’re just waiting for the next data point to to see what, you know, breaks first. Is it, you know, do we see higher inflation first? Do we see a weakening labor market first? Um, I think eventually, you know, we will see signs maybe that the labor market is is starting to weaken before we see, you know, concerning signs of of price increases. Um, as we’re getting into the start of the summer, um, this is a time of year, the last couple years where the unemployment rate has risen, um, because we have had a loosening labor market driven by very low hiring. Um, and that hiring issue could look even worse this time of year, you know, this year because of uncertainty. Um, so I think we will see signs that the labor market is slowing as we get into midsummer. Maybe that allows the Fed to cut, but for the next, yes, couple months, they’re they’re probably on hold.

08:07 Speaker A

Veronica, great to have you on the show today. Thanks so much for joining us.

08:14 Veronica Clark

Thank you.