The U.S. economy seems to be feeling the strain as President Trump’s sudden moves to cut federal spending, lay off government workers, and slap tariffs on major trading partners send ripples through the business world and spill over into states and cities.
Recent economic surveys point to a souring of consumer sentiment, climbing inflation expectations, and stalled business investment plans as funding freezes, worker layoffs, and potential trade wars loom.
Locally, many economies brace for a swift pullback in federal aid, pushing officials to consider tax hikes or floating municipal bonds to balance their budgets. While President Trump acknowledges that his policies might cause some initial distress, early indicators suggest his aggressive tactics might spell deeper economic risks.
“There’s more uncertainty than is generally acknowledged,” says Michael Strain, an economist at the American Enterprise Institute. “The cloud of uncertainty around trade policy and the actions of the Department of Government Efficiency is likely to cool investment and expansion plans.”
Trump stepped into office last month amidst stable economic growth and low inflation. The U.S. economy remains a global powerhouse.
However, economists are wary that his broad tariff plans might trigger price hikes and trading scuffles that could dampen growth. Early signs seem to affirm their concerns.
Halting foreign aid and freezing federal funds are already straining American farmers reliant on export markets linked to U.S. aid programs. While courts have paused some of Trump’s funding freeze orders, disruptions have already hit early-childhood initiatives like Head Start. Climate and infrastructure projects worth billions from the Biden era are now uncertain.
Even the labor market, historically robust with a 4% unemployment rate, appears threatened. The so-called Department of Government Efficiency, spearheaded by Elon Musk, has started cutting thousands of federal jobs. These cuts are just beginning, as the department scrutinizes how agencies fit with Trump’s goals.
These federal job cuts are causing a stir beyond Washington, sparking protests at local town halls and concerns from Republican lawmakers worried about the economic fallouts in their areas.
“Potentially over 100 Alaskans face job losses due to the Trump administration’s reduction-in-force order for federal workers,” Sen. Lisa Murkowski from Alaska shared on X. “Such abrupt job cuts harm communities and thwart opportunities in Alaska.”
Institutions dependent on federal funding from agencies like the NIH and NSF are preparing for cutbacks amid possible payment freezes and policy shifts.
On Thursday, Stanford University announced a hiring freeze in response to anticipated NIH funding cuts and possible hikes in endowment taxes.
In Pennsylvania, Governor Josh Shapiro has taken legal action against the Trump administration over $2.1 billion in frozen or scrutinized federal funds earmarked for essential programs. Although the funds have been restored, the freeze introduced significant uncertainty.
“The federal government made commitments with state agencies to deploy those funds within communities,” Shapiro stated. “Those commitments are binding deals.”
Emily S. Brock of the Government Finance Officers Association notes that local leaders are scrambling to identify which projects face disruption from federal funding halts. The sudden loss could lead to breached contracts if services are abruptly stopped.
In response to the withdrawal of federal support, municipalities are increasingly issuing bonds and searching for alternative revenue streams, marking a stark change from the post-pandemic relief era, which saw $350 billion in aid from the Biden administration.
“To jump from $350 billion to none is a significant shift,” Brock commented. “State and local governments will need to get creative.”
Economists and analysts are growing increasingly concerned about the overarching economic impacts.
Apollo Global Management estimates potential layoffs from the Department of Government Efficiency could hit 300,000, and factoring in government contractors, it could approach a million. Although it’s a fraction of the nation’s 160 million workforce, it could still affect the job market and other economic arenas.
“Rising layoffs will likely push weekly jobless claims higher, impacting rates, equities, and credit markets,” stated Torsten Slok, Apollo’s chief economist, in a recent report on economic risks.
Economic indicators point to rising pressure, with tariffs being a central concern. This month, Trump enacted 10% tariffs on Chinese imports and almost enacted 25% tariffs on Canadian and Mexican goods before offering a temporary reprieve. The administration also plans to impose higher “reciprocal” tariffs on imports, including cars, semiconductors, and steel.
The Conference Board survey indicated a sharp drop in consumer sentiment in February, the most significant since 2021, due to employment prospects and business condition concerns fueled by tariffs.
The S&P Global’s corporate activity measure also reported slowing U.S. business expansion in February, attributing it to “uncertainty surrounding new government policies.”
The housing market is also under strain. The National Association of Homebuilders noted in its latest report that builder confidence hit a five-month low amidst worries about tariffs, high mortgage rates, and housing costs.
Despite these concerns, Trump downplayed the idea that his policies are sowing economic doubts during a cabinet meeting.
“If you look at national confidence, it shows the largest increase ever recorded in this chart after my election,” he remarked without specifics.
Morgan Stanley economists predict tariffs could raise inflation, as measured by the Personal Consumption Expenditures index, by 0.6% and reduce real consumer spending by up to 2%. The overall hit to inflation-adjusted growth could reach 1.1%.
The Federal Reserve’s main worry, as outlined in their latest meeting minutes, is inflation rather than growth, which means businesses and consumers may not see borrowing cost reductions anytime soon.
Nevertheless, Trump’s top economic advisers argue that other presidential policies—boosting energy production, cutting taxes, and reducing regulatory burdens—should offset any negative tariff impacts.
During a Fox News interview, Treasury Secretary Scott Bessent defended the administration’s actions to curtail federal government size, aiming to ensure the private sector isn’t overshadowed by government spending.
“There was excessive government spending with the previous administration,” Bessent stated. “We aim to reduce that.”
Even Trump’s supporters are slightly apprehensive about the economy. Following a stock market dip last Friday, Larry Kudlow, a former Trump economic adviser, acknowledged investors’ frustration over tax cut delays and the potential temporary impact of tariffs on prices.
“Right now, the signs are pointing to slower growth and higher inflation,” Kudlow noted. “Not a positive outlook.”
Colby Smith contributed reporting from New York.
