What Will Happen With The Economy in 2025?

In last month's blog post I talked about inflation and the driving factors that caused it over the last 4 years.  The results of the presidential election this month indicated that reducing inflation and improving the cost of living was the dominant factor that motivated the majority of voters to elect Donald Trump.  While the details of his economic policy were not articulated much during the election campaign, he spoke broadly of the desire to impose large scale tariffs on imports, conduct mass deportations of illegal immigrants, and cut taxes and government regulations.  While they are bold and extreme, it remains to be seen how much of these policies will actually improve the cost of living of everyday working people.

The stock market initially surged after the election as investors view a low taxes and business regulations favorably.  However, upon closer inspection, these proposed policies, depending on the degree they are implemented, could actually have a negative impact on the economy moving forward.  Now that the voters have spoken, what does this mean for the economy going forward and what can we do about it?

What Is The Potential Impact of Trump's Economic Agenda?

Taxes

The Federal Reserve began a course of reducing interest rates this year as inflation was finally brought under control.  However, the expected extension of the Tax Cuts and Jobs Act and further corporate tax cuts could potentially fuel increased consumer spending and drive the Markets upwards.  While this is a plus, this could cause inflation to increase again.  In turn, the Federal Reserve may pause their interest rate reduction strategy or even reverse course and increase interest rates once again to reduce inflation. In addition, large tax cuts without a corresponding increase in government revenue will increase government debt which drives up treasury bond rates. This does not bode well for ordinary working people because higher treasury rates results in higher interest rates on business, mortgage and auto loans.

Tariffs

While the economic results were mixed, Trump would like to double down on his tariff policy from his first term and impose a 10% to 20% tariff on all imports plus impose significantly higher tariffs on goods coming in from China.  The goal of this proposed tariff policy is to protect American jobs and industries.  Even if this tariff policy is fully implemented, it is uncertain if these goals will be achieved.  The more likely impact of this policy will be to worsen inflation as the higher costs that companies will incur due to the direct and indirect costs of tariffs tend to be passed down to consumers via higher prices.

Immigration

Labor is the driving force behind economic success in the U.S.  While illegal immigration must be brought under control, a mass deportation policy will leave a void in many sectors of the U.S. economy such as farming, construction, manufacturing, and hospitality to name a few.  A sudden labor shortage would be incredibly disruptive and drive up costs for most goods and services in the U.S. causing inflation to rise.  Furthermore, the price tag to implement this policy would be massive and incredibly complex to execute.  Therefore, most policy experts advocate comprehensive immigration reform instead.  Unfortunately, due to lack of political will, real immigration reform will not happen anytime soon. 

How Can We Insulate Ourselves from Economic Uncertainty?

As I illustrated above, the economic impact of the next president's policies is uncertain.  We may be headed for a stronger stock market due to lower taxes and pro-business environment.  It could also mean higher inflation and consumer prices.  How do we insulate ourselves during uncertain economic times?  In times like these, we should focus on what is in our control and remain true to our basic financial fundamentals.

Maintain adequate Reserves

To protect yourselves from sudden unexpected expenses or loss of income, strive to have an initial cash reserve equal to at least 3 months of expenses or 10% of your gross household income.  If You are a homeowner and still employed, you should strive to build a secondary emergency reserve equal to the greater of 20% of your household income or 2 years of mortgage payments. 

Focus On Savings

While you cannot control how the Markets will perform, you can control how much you save.  Strive to save at least 10% of your gross household income each year.  If you are working, contribute to your company retirement plan (401k/403b, etc.) to the full extent possible.

Live Within Your Means

To protect yourself from having to dip into your savings or incur consumer debt, strive to understand your household spending patterns and live within your means. 

Invest In Your Career 

For those of you that are still gainfully employed, take a step back and review our career and current job skills.  Is your company and / or job stable?  Make a goal to update and / or improve your job skills so that you remain relevant, promotable, and hirable.

Live a Healthy Lifestyle

As the saying goes, "Without health, nothing matters".  Nothing can derail a financial plan faster than long-term sickness or injury.  Each day strive to eat well, exercise, meditate, and relax.  Emotional, spiritual, and physical health are just as important, if not more important then financial health. 

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