US will dodge recession, but Trump's policies will slow economic growth: Report

A Moody's Analytics report projects that President Trump's economic policies, particularly tariffs and immigration crackdowns, will significantly diminish U.S. economic growth by an average of 0.4 percentage points annually, resulting in 1.7% average growth, and elevate inflation by nearly half a percentage point annually to 2.6%. While this updated forecast avoids a recession, it still anticipates the economy being 1.3% smaller by 2028 and increased unemployment, despite some offsetting positive catalysts like tax cuts.

Analysis

A Moody's Analytics report indicates that current U.S. fiscal policies, while not expected to induce a recession, will create significant stagflationary pressures. The analysis projects that policies centered on tariffs and immigration crackdowns will reduce annual economic growth by an average of 0.4 percentage points, resulting in a modest 1.7% average expansion during the presidential term, compared to the 2.3% average post-Great Recession. Simultaneously, these policies are forecast to add nearly half a percentage point to annual inflation, pushing the average to 2.6% and delaying the Federal Reserve's achievement of its 2% target until 2028. The primary negative catalyst identified is tariffs, which erode consumer purchasing power and are only partially offset by stimulus from tax cuts and increased government spending. This creates a challenging environment for the Federal Reserve, which faces a dilemma between supporting a softening labor market—with unemployment forecast to peak at 4.7% in 2027—and combating persistent inflation. The current forecast is an upward revision from a previous recessionary prediction, attributed to less severe foreign trade retaliation and lower-than-anticipated deportation figures, which Goldman Sachs estimates at an annualized pace of 600,000.

Key Decisions for Investors

• Given the forecast for slower growth and persistent inflation, investors should consider reducing exposure to economically sensitive cyclical sectors and favoring companies with strong pricing power that can better navigate an inflationary environment.
• The projected delay in reaching the Federal Reserve's 2% inflation target suggests a 'higher for longer' interest rate environment, warranting a cautious approach to long-duration fixed-income assets.
• Monitor trade policy developments closely, as the current forecast assumes restrained foreign retaliation; any escalation in trade disputes would represent a significant downside risk to corporate earnings and overall economic growth.
• Exercise caution with consumer discretionary stocks, as the combination of rising unemployment, reduced government social spending, and tariff-driven price increases is expected to dampen consumer spending power.