It has been a wild year politically in the United States under the second term of President Donald Trump, who has delivered on his promise to shake things up in a big way.
Seeking to drastically reduce the U.S. trade deficit, Trump has instituted tariffs on numerous countries, and later delayed, rescinded or changed many of them. Trump recently announced a 25% tariff on Japan and South Korea to begin Aug. 1. The ever-changing tariff situation has created a tremendous amount of uncertainty, putting some businesses into a holding pattern.
The Trump administration has also undertaken a massive crackdown on illegal immigration. The impact of that on the U.S. economy and the labor market are just beginning to be felt.
Earlier this month, Trump signed into law the “Big Beautiful Bill,” which he pushed and includes major tax breaks and spending cuts, that could provide a major boost to the economy. Democrats have complained the tax cuts are heavily in favor of the wealthiest Americans and that cuts to Medicaid and the Supplemental Nutrition Assistant Program (SNAP) will have a devastating effect on lower-income individuals.
With so many big changes sending shockwaves through the country, the U.S. economy slumped during the first quarter, with U.S. GDP falling 0.5%. However, the economy performed better during the second quarter and the Federal Reserve Bank of Atlanta estimates that U.S. GDP grew 2.6% during the quarter.
Speaking of the Fed, Trump has also made waves by calling for the resignation of Federal Reserve chairman Jerome Powell because the Fed has held the federal funds rate steady this year, despite modest inflation with the Consumer Price Index rising only 2.7% in June from a year ago. While Trump has publicly called for interest rate cuts, the Fed has been reluctant to do so anticipating that tariffs imposed by Trump could lead to price hikes.
The Fed hasn’t cut the federal funds rate since 2020 when it tried to boost the economy during the COVID-19 pandemic. It raised interest rates 14 times in 2022, 2023 and 2024 to combat inflation.
Bottom line, there has been a lot to digest during the first half of 2025 and many business leaders are still trying to figure out what’s going to happen next and how to move forward.
Seeking clarity, BizTimes editor Andrew Weiland conducted a Q&A with Brian Jacobsen, chief economist of Brookfield-based Annex Wealth Management, to gain insight into how the events of the first half of the year are affecting the economy and what to expect for the rest of the year.
BizTimes: The U.S. economy got off to a tough start to the year and saw GDP dip slightly (0.5%) during the first quarter. The Federal Reserve Bank of Atlanta projects a second quarter rebound with GDP growth of 2.6%. What’s your take on the current state of the U.S. economy?
Brian Jacobsen: “Tariff uncertainty has led to hesitancy on the part of consumers and business owners. That hesitancy has hurt growth in the near term. Now tariffs are in the headlines again with the Aug. 1 deadline that may or may not be firm. Thankfully, we now have tax certainty with the passage of the ‘One Big Beautiful Bill.’ It contains a lot of incentives to build and invest in America. Once we get through the tariff drama, the story should be one of reaccelerating growth for the balance of the year.”
Your use of the term “hesitancy” is interesting. We are getting a sense that a lot of businesses have been struggling to deal with uncertainty caused by Trump administration policies during the first half of the year (we’ll address those more specifically later). What do you think?
“According to business and CEO confidence surveys, they’re saying that uncertainty is affecting business decisions and activity. It first showed up in pulling back on expansion plans because they didn’t want to risk expanding in an area where they wouldn’t be cost competitive. Now the uncertainty is being amplified because it is not just about policies, but uncertainty about the health of consumers and their customers. If we can get the uncertainty resolved early in the Trump administration, we can have more clarity for the balance of it. In a way, this is like ripping the Band-Aid off and we’re just going through the painful part now.”
As for specific issues, let’s start with tariffs. During the first half of the year Trump has imposed numerous tariffs on a host of countries, then he made several changes to the amount of the tariffs and has suspended some. How have the tariffs affected the economy so far this year and what impact do you think they will have moving forward? Are we seeing or are we going to see a severe drop in trade activity?
“The tariffs have had a mixed impact on the economy. While some industries have benefited from the protectionist measures, others have faced increased costs and supply chain disruptions. Moving forward, the uncertainty surrounding tariffs may lead to a cautious approach in trade activities, potentially causing a drop in trade volume. However, administration officials have said that they hope the tariffs can be used as leverage to pry open the foreign markets. In that case, we could see more trade activity. The trade deal with Vietnam is an experiment of whether that will work. The U.S. will impose 20% tariffs on goods from Vietnam, and Vietnam will apply 0% tariffs on U.S. goods. The problem, of course, is whether the people of Vietnam want or can afford what we produce. I don’t see a lot of them buying large U.S. automobiles.”
Another big move by the Trump administration has been the intense crackdown on illegal immigration, including stepping up efforts to deport illegal immigrants. Is this having any impact on the labor market and how do you think the labor market will be affected as this push continues?
“The crackdown on illegal immigration has led to a tighter labor market, particularly in industries that rely heavily on immigrant labor, such as agriculture and construction. As the push continues, we may see increased labor shortages and upward pressure on wages in these sectors. There’s evidence to indicate that the illegal immigration crackdown is also weighing on legal immigration. It takes time, moving and retraining for people to switch from a job in one industry to a job in another industry. We will also likely see continued automation and investment in technology to fill the void. The ‘One Big Beautiful Bill’ lowers the cost to businesses of making that switch. We could continue in this uncomfortable situation where companies are afraid to hire because they don’t know what demand will look like, but they’re also afraid to fire because recruiting and training is time-consuming and costly.”
Led by the work of the new Department of Government Efficiency (DOGE) the Trump administration has directed substantial cuts to federal spending. What impact do you see that having on the economy in the short and long term?
“In the short term, the cuts to federal spending may lead to reduced government services and potential job losses in the public sector. We’re already seeing that in the labor data with federal employment shrinking. There has been a steady decline in federal employment this year that will likely pick up steam. There are also longer wait times to speak to a representative at many government agencies. Even the economic data releases themselves have been affected. The Bureau of Labor Statistics collects data on prices across the country, but with staffing shortages they’ve had to cut back on the amount of data they actually collect. That’s affecting the reliability of those economic indicators. However, in the long term, if the cuts lead to a more efficient government, it could result in a more sustainable fiscal position and potentially lower taxes, which could benefit the economy.”
The Federal Reserve has held interest rates steady this year, despite President Trump’s complaints and criticism of Federal Reserve Chair Jerome Powell. Is the Fed doing the right thing? Do you anticipate any changes to the federal funds rate the rest of the year?
“Inflation isn’t showing signs of accelerating, yet. The labor market is softening, but it’s still solid. Because Fed officials think inflation will slowly build over the next few months, they feel like they are justified in holding rates where they are. I think it’s more likely that companies will end up eating of lot of the tariff costs, which will weigh on profits, which will weigh on growth. If my view is right, then they should cut, but if their view is right, then they should stay on hold. Sometimes you just have to run the experiment and see how things play out. Thankfully, the Fed has demonstrated a willingness and ability to quickly and decisively change course.”
Have we finally gotten inflation under control? Or are tariffs and the labor shortage going to drive up prices? What do you expect for the U.S. inflation rate for the rest of the year?
“While inflation has been relatively stable, imposing tariffs will affect prices, profits, or production. It’s likely to affect all three to various degrees. Thus far, tariffs are showing up in only a handful of consumer prices like imported food items. It will likely show up in car and electronic prices, but the extent to which it will depends on the tug of war between businesses trying to hike prices and trying to compete for market share. That’s why nothing is a foregone conclusion in economics. The labor market shortage is mostly in certain industries, but productivity is improving, so higher wages aren’t inflationary. It would be different if we saw productivity fall.”
The stock market has been on a roller coaster ride this year. Is that a reflection of the overall economy? What do you anticipate from equity markets for the rest of the year?
“The volatility in the stock market reflects the broader economic uncertainties and policy changes. The market anticipates the economy. Back in early April, the market was expecting a recession, but with the dialing back of the tariffs, the market is saying a recession is a lot less likely. This is why markets can be very confusing. Markets price in expectations and move when reality defies those expectations. For the rest of the year, we can expect continued fluctuations as markets react to new information and policy developments. However, the underlying fundamentals of the economy remain strong, which should provide some support to equity markets.”
Israel’s war against Hamas in Gaza rages on. Israel and Iran have been engaged in fighting, and the U.S. also exchanged hostilities with Iran. What impact will these events have on the economy? Are we in danger of a major global catastrophe that would devastate the world’s economy?
“The conflict in the Middle East poses a risk to global economic stability, particularly through its impact on oil prices and geopolitical tensions. It’s well above my paygrade to say whether a global catastrophe is likely or not. If it happens, a person’s 401(k) balance will be the least of his worries. Assuming we don’t get that catastrophic outcome, remember that the U.S. has been a net exporter of oil for many years. Consumers will feel the pinch of higher gasoline prices and that can affect spending on all sorts of goods and services, but motor fuel is only about 3% of a typical household’s spending. That’s half of what it was during the 2012-2014 period. It’s a situation that needs close monitoring, but it’s more of a political and military issue than a household finance issue.”
Earlier this month, Trump signed the comprehensive “One Big Beautiful Bill” into law. What impact do you think it will have on the economy?
“For most people, passing the bill will feel like a continuation of tax policy, not a tax cut. A higher standard deduction, child tax credit, and no income taxes on tips or overtime are all things that can show up quickly in people’s pocketbooks. They may be subtle for the overall economy, but really significant for the individuals who benefit. For many businesses, the incentives to invest in property, plant and equipment could be a gamechanger for the economy. Those investments can not only help growth this year but serve as a solid foundation for future growth. There are a lot of legitimate concerns about the deficit effects. Those do need to be dealt with. A deficit of 6.5% of gross domestic product during an economic expansion is unjustifiable. It needs to get to something more sustainable, like 3%, but it doesn’t have to happen all at once. Until that important issue is resolved and there’s a path to 3%, interest rates are likely to keep bouncing around at these relatively high levels. Congress will have another shot at using budget reconciliation in 2026. While 2025 was all about getting a tax deal, 2026 will likely focus on bending the spending curve of the government.”
Looking ahead, after a tumultuous start of the year politically and economically in the United States, do you think the economy will slip into a recession during the second half of the year, or are we going to see growth?
“Despite the challenges, the economy is likely to see growth in the second half of the year. The resilience shown in the second quarter and the potential positive impacts of policy measures suggest that a recession is unlikely. However, continued vigilance is necessary to navigate the uncertainties. President Trump front-loaded a lot of the disruptive policies to try to get those out of the way. By the end of July, which is part of the third quarter, we should have a lot more clarity on policy and businesses can get back to the business of serving clients instead of waiting and watching what policy changes will or won’t happen.”
Real GDP in the United States and Wisconsin
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Source: U.S. Bureau of Economic Analysis[/caption]
S&P 500 performance since 2023
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Source: S&P Dow Jones Indices, FRED[/caption]
Interest rates since 2015
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Source: Fanny Mae, Federal Reserve, FRED[/caption]
