OPINION:
President Trump faces an economy on tenterhooks, with both inflation and unemployment worsening.
Much more than tariffs are pushing up prices. Services account for 61% of the consumer price index and 76% of the core CPI, which excludes the volatile food and energy sectors. Services prices have risen 3.6% annually since April and show no signs of slowing down.
Although Mr. Trump’s tariffs on goods imports affect the costs of materials and equipment for impresarios, dry cleaners and day care centers, those are second-order effects.
The prices those businesses charge for event tickets, cleaning dresses or tending children depend more on overall demand and the up to 70% of business costs paid for labor.
The top 20% of households account for more than three-fifths of consumer spending, and the most volatile portion of their income comes from stock market gains and losses.
On paper, additions or subtractions to income from equities aren’t dominant because income statistics don’t capture unrealized capital gains and losses. These are counted only when we sell shares and the difference between purchase and sale prices is calculated.
Still, as the top earners monitor portfolio values, those influence how much they spend.
When the stock market is up, the wealth effect drives up demand for many discretionary items, including luxury accessories and cruise ship tickets. Mr. Trump wants lower interest rates to boost an economy slowed by tariffs, which tax many household goods that ordinary folks purchase, such as groceries.
Policymakers are looking to lower mortgage rates to boost new home sales, but the lack of immigrant workers will limit construction.
More immediately, lower interest rates should boost stock prices and aggregate demand.
The labor market is a headache in multiple dimensions.
Mr. Trump’s immigration policies greatly curtail the natural rate of increase in the labor force. He is deporting criminals and any other illegal immigrants that U.S. Immigration and Customs Enforcement can scarf up.
Population growth and legal immigration could create up to 90,000 new workers monthly, but he appears intent on limiting legal entries too.
Without new foreign workers and near full employment, the workforce could add as few as 24,000 monthly, close to the average for the past three months.
Without more migrant workers than the Trump White House is willing to tolerate, agriculture, construction, manufacturing and many service businesses will continue to face chronic labor and skills shortages.
The economy will be challenged to grow more than 2% annually, and many long-term unemployed will face bleak prospects.
Increasingly, AI is eliminating midlevel, often college-educated, professional and white-collar positions.
In a nutshell, when 10 computer programmers, editors or lawyers lose their jobs, significantly fewer than 10 new positions open somewhere else.
For new college graduates lacking a degree in a hot area such as nursing, it’s the toughest long-term jobs market I’ve seen since the global financial crisis.
One way or another, Mr. Trump will get significantly lower interest rates. He can replace Federal Reserve Chairman Jerome Powell in May.
It’s unlikely, though not impossible, that he can fire Fed Governor Lisa Cook to make the majority on the board Trump appointees, but her plight must weigh on the minds of the other Fed policymakers.
Governors earn $225,700 annually, a tidy sum to most Americans, but it can evaporate quickly when paying Washington attorneys to fend off a Justice Department investigation.
Together, lower interest rates and the fiscal stimulus of lower taxes from the One Big Beautiful Bill Act will lift demand more than his tariffs stifle it, but without substantially more workers, inflation in services and elsewhere will accelerate.
Inflation in goods industries caused by tariffs could be transitory, but the persistence of labor shortages, especially in the construction and services sectors, will lock in inflation expectations above 3%.
The real threat to near-term prosperity is an economy flying at low altitude.
Creating as few as 24,000 jobs a month, it won’t take much of a shock to thrust the economy into a recession.
For example, a further rupture in trade with China that cuts off supplies of rare earth minerals and limits U.S. auto, defense and technology manufacturing, or an epidemic from an ill-conceived absence of vaccinations for children.
Mr. Trump’s economic strategy — federal tax and spending cuts, tariffs to shift the U.S. economy more into manufacturing, tight immigration policies to push more Americans into the resulting jobs and low interest rates to supercharge stocks — should be unsettling even to Mr. Trump’s MAGA voters.
The top 10% or 20% of households could withstand a haircut from a downdraft in the stock market. For most of them, that may mean a few weeks in Florida instead of a Mediterranean cruise.
For the rest of Americans, still licking wounds from COVID-19, it’s a terribly risky proposition.
• Peter Morici is an economist and emeritus business professor at the University of Maryland, and a national columnist.
Please read our comment policy before commenting.