Many Americans have fond memories of the Trump economy that ran from 2017 to 2021. Inflation, interest rates, and gasoline prices were low; the stock market did well; and pre-COVID job and economic growth were solid.
But if Trump wins a second term, anybody expecting a quick return to the Goldilocks economy of his first term is likely to be very disappointed. In a preview of Trump 2.0, Goldman Sachs estimated that the economy would shrink by half a percentage point during Trump’s first year if he imposed all of his policies, including new tariffs on imports and a business tax cut that pushed annual deficits higher. Harris’s plan, by contrast, would modestly boost GDP growth, according to Goldman.
During his first term, Trump benefited from benign economic trends dating all the way back to the Great Recession of 2008 and the slow but steady recovery that followed. The post-COVID economy is a different animal with stronger inflationary pressures, more protectionism, costlier energy, and more global turmoil likely to produce shocks. Those forces will dominate the economy during the next four years no matter who is the US president.
Many voters blame or credit the president for whatever happens on their watch. But market forces drive the economy, and presidents normally have only a marginal effect. Looking at four key indicators — inflation, interest rates, gasoline prices, and GDP growth — shows that the trends under Trump were largely the same as those under his predecessor, Barack Obama. The COVID disruptions that began in 2020 changed the trajectory for all four of those metrics, as the following chart shows.
Inflation
A surge in prices since 2021 has been Biden’s biggest economic vulnerability. But Trump didn’t do anything special to keep inflation low. Except for occasional spikes in energy prices, there was no meaningful inflation from 1990 to 2021. The Federal Reserve was more concerned about deflation, given that overall price levels briefly went negative under Obama in 2015, as the chart above shows.
One huge factor keeping inflation contained for most of the last 30 years was globalization and a surge in cheap imports from China, in particular. Trump’s trade wars during his first term, when he slapped tariffs on imports, began to close the door on cheap imports. Biden kept those tariffs in place, and both Democrats and Republicans now back a tougher line on China and a renewed emphasis on boosting domestic manufacturing.
That could be good for the US economy overall, but stuff made in the USA is almost always more expensive due to higher pay and more stringent safety and environmental rules. There’s less of a built-in hedge against inflation now than there was during the peak days of globalization, which might have been around 2010 or 2015. That's not likely to change, and those cost pressures will put a higher floor under prices for many things.
Republican presidential nominee former President Donald Trump gestures as he departs a campaign event at Central Wisconsin Airport, Saturday, Sept. 7, 2024, in Mosinee, Wis. (AP Photo/Alex Brandon) ·(ASSOCIATED PRESS)
Interest rates
During the Great Recession in 2008, the Federal Reserve slashed short-term rates to 0, the first time it had ever gone that low. That was shock therapy meant to jolt the economy back to life amid a financial panic and near depression. The Fed raised rates a bit from 2015 through 2019, but the lack of inflation allowed it to go slow — then slash rates to 0 again when COVID arrived in 2020.
Consumers got used to super-low interest rates, but the whole period from 2009 through 2021 was abnormal. From 1990 through 2008, the Fed's short-term rate averaged 4.25%. From 2009 to 2021, the average was 0.52%.
Consumer rates followed the same pattern. From 1990 through 2008, the average 30-year fixed mortgage rate was 7.3%. From 2009 through 2021, it was 4%. Even now, mortgage rates around 6.4% are below the historical norm. With the Fed poised to cut rates soon, consumer rates could drift down a bit. But stronger inflationary pressure than in the past will probably prevent the Fed from cutting to anywhere near the levels during the decade after the Great Recession.
Gasoline prices
During Trump’s term, gas prices averaged $2.57, compared with $3.60 so far under Biden. Even adjusted for inflation, gas prices were cheaper under Trump. But Trump didn’t do anything to lower pump prices, even though he’s a fossil fuel lover whose mantra is “drill, baby, drill.” Trump simply came into office as the fracking boom was near peak production and energy providers all around the world were overproducing.
In terms of profitability, energy was the worst-performing sector during the Trump presidency because drillers were foregoing profits to gain market share. OPEC joined that game, adding to overproduction, which pushed prices to unusually low levels. When COVID hit in 2020, energy profits collapsed along with retail prices, and the whole industry went through a shakeout.
The result is that energy firms and their investors now prioritize profitability and “capital discipline” over market share — no matter who’s the president. “Our energy team believes that it is unlikely that a Trump administration would translate into more actual drilling relative to a Harris administration,” investing firm Raymond James concluded in a Sept. 10 analysis of possible election outcomes. “A push to decrease the price of US energy could potentially disincentivize production from domestic oil and gas names.” Energy firms, in short, got burned during Trump's presidency, and they're not going to do that again.
Overall economic growth
Trump wants people to believe he presided over the “best economy in the history of our country,” but it was really about the same as during Obama’s second term. Under Obama, from 2013 through 2016, real GDP growth averaged 2.5% per quarter. Under Trump, during the three years before COVID hit, it averaged 2.8%. Including COVID, GDP growth under Trump averaged 2.4%.
Growth under Biden has been stronger, averaging 3% per quarter. But higher inflation and interest rates have more than offset that in voters’ minds. Inflation peaked at 9% in 2022, and while it’s almost back to normal, Americans still feel stung by three years of a hot economy in which cheap imports and plentiful energy no longer cushioned shocks the way they used to. This year’s presidential election isn’t likely to change that.
