When Mr. Trump won his first term as President of the United States in 2016, the U.S. macroeconomy was in good shape (see the table on the left). Real GDP had grown at a steady 2.18% over the past year, and the unemployment rate stood at 4.7%, around its natural or non-inflationary level. Core CPI inflation (excluding food and energy prices) was 2.59%, and the Federal Reserve had only just begun increasing its policy rate since the 2008 crisis. The Federal Funds Effective Rate remained low at 0.55%, keeping monetary policy in an expansionary phase. The ten-year government bond yield, an indicator of the government’s borrowing cost, was at a manageable 2.49%. The federal budget deficit was 3.11% of GDP, slightly higher than desirable but not alarming. However, the federal debt-to-GDP ratio stood at 104.6%, its highest level in over 50 years.

Except for the high federal debt level, this was a healthy macroeconomy capable of withstanding Mr. Trump’s stimulative policies—such as tax cuts—without causing excessive inflation. These policies helped lower the unemployment rate to a historic low of 3.5% in February 2020, just before the onset of the COVID-19 pandemic. Real GDP growth was also strong, reaching 3.35% in the fourth quarter of 2019. Inflation remained under control, primarily because the Federal Reserve steadily increased its policy rate, from 0.55% in December 2016 to 2.4% in early 2019.

Although the tax cuts successfully stimulated the economy, they did not pay for themselves. As a result, the federal budget deficit increased to 4.57% of GDP in 2019, even before the pandemic. Federal debt remained elevated, standing at 105.8% of GDP in the fourth quarter of 2019.

In the final year of his first term, the COVID-19 pandemic disrupted the macroeconomy. It would be unfair to attribute all the resulting economic turmoil to Mr. Trump’s policies, therefore I will not include COVID-related numbers here.

Fast forward to his second election victory in November 2024, and the macroeconomic landscape looks quite different from what he inherited in 2016. Real GDP grew by 2.48% in 2024, and the unemployment rate is 4.1%, with little room for further decline (in the last five years, it reached a low of 3.5% in February 2020 and 3.4% in April 2023). Most importantly, core CPI inflation remains stubbornly high at 3.75%, well above the Federal Reserve’s 2% target. The Federal Funds Rate is elevated at 4.33%, with little prospect of significant reductions anytime soon. The cost of government borrowing has risen, with 10-year bond yields at 4.39%. On top of this, the federal budget deficit has surged to 6.28% of GDP, and federal debt has climbed to 120.7% of GDP.

It is clear from the above numbers that the U.S. economy is overheating. In such an environment, expansionary policies could drive inflation much higher than they did during Mr. Trump’s first term. The imposition of tariffs on imports could exacerbate inflationary pressures. Given the current state of the U.S. economy, Mr. Trump’s macroeconomic policymakers must proceed with far greater caution than they did eight years ago.

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