The Impact of Trump's Policies Has Not Disappeared, Just Delayed

SadaNews - Many analysts and investors misunderstand what is happening in the US economy. Some believe that the uncertainty surrounding President Donald Trump's trade and other economic policies is starting to fade, while a small but influential minority argues that the deportations and tariffs imposed by the administration are not causing the expected harm.

They point out that inflation has risen only slightly before falling in 2025, while the latest data shows that the economy is growing at its fastest pace in two years.

These erroneous assessments stem from a fundamental misunderstanding of how government-induced uncertainty affects the economy. This confusion is reasonable, as no presidential administration has imposed this level of uncertainty on the US private sector for a century or more.

Furthermore, the strong economic growth driven by investment in artificial intelligence makes recognizing these unusual damages more challenging. Nevertheless, careful analysis reveals that the effects of the inflationary recession resulting from Trump's policies are beginning to emerge and will become very clear as we approach April 2, the first anniversary of the so-called "liberation day."

It is not surprising that it takes time for the obstructive effects of tariffs and deportations to show up in government statistics on corporate, household, and investor decisions.

In our analyses of Trump's economic program at the "Peterson Institute," we have consistently expected that it would take at least a year for its impacts to show up in the macroeconomic data. I expect the consumer price index for 2026 to rise by 4%, possibly more, by the third quarter, compared to 2.7% in November, the latest reading.

Corporate Confusion Amid Questions

It may seem like a long time since Trump initiated mass deportations of undocumented immigrants and began imposing sweeping tariffs on imports, which vary significantly by product and country of origin. However, businesses have faced many uncertainties that they needed to resolve before deciding how much to raise prices or whether to change their supply chains.

Key questions emerged amid Trump's policies, such as: Will he carry out his threats regarding tariffs? If he does, will the tariffs be negotiated away in a subsequent deal, or will courts strike them down? If the tariffs persist, can my company or sector secure an exemption through political pressure or expect reimbursement like what Trump provides to farmers?

Then there are supply chain considerations. Should inputs be sourced from Mexico instead of China? Should production be shifted from China to a country with lower tariffs? Should I bring production back to the United States?

Even the largest and most advanced manufacturers, such as Caterpillar and Toyota Motor, have been hesitant to make significant decisions about reshuffling production.

If the largest companies, which possess the broadest analytical resources and global expertise, are hesitant, how long will it take for small and medium-sized enterprises to respond?

Delay in Burdening Consumers

Companies also gained some time as they stockpiled imports before Trump’s trade war. But once these stocks run out, as has been the case in most sectors of the economy so far, they will have to pass on the higher costs to consumers.

The implementation of unprecedented tariffs takes time to affect the economy due to delayed decision-making, as does the fundamental shift in US immigration policy.

The Trump administration claims to have deported about a million undocumented immigrants during the first year of his second term, but what appears to be one of the most monotonous graphs in the world tells a different story.

These straight lines show that employment levels in the US sectors most reliant on undocumented labor, such as healthcare, childcare, agriculture, food manufacturing, and residential construction, have remained nearly stable since Trump took office again. This implicitly means that a large number of undocumented workers have not left yet.

Despite the inherent difficulty of tracking undocumented employment, government data does not reveal a large number of legal workers, whether they are American citizens or foreigners, moving into these sectors. These occupations are characterized by poor working conditions, low wages, and few or no benefits, which is why they are dominated by immigrants.

To attract legal workers to fill these jobs, employers will need to offer higher wages. However, wages in these sectors have not seen any increase.

Robots and Machines Are Not the Solution

Robots are not ready, and machines are not cost-effective enough to replace low-wage human workers in areas such as harvesting fruits and vegetables, home healthcare and childcare, poultry processing, open-pit mining, and home construction.

In any case, a noticeable increase in investment in automation to save labor in these sub-sectors was expected to show up in the data, but that did not happen.

Just as companies need time to adjust to the Trump administration's policies, so too do undocumented families. They think carefully about the decisions they need to make amidst this uncertainty, which explains the delay in departure and the lag in macroeconomic impact.

First, will Trump carry out his threats of deportation? Will immigration officers pursue me in my residential area or workplace? If they do, how much can I earn before then? Should I leave by myself to be able to apply for legal residency later? Should I take my family with me or not?

Employers relying on undocumented labor have their decisions to make as well. It can be argued that many companies have chosen to risk ICE raids because they can pay lower wages while their workers are under threat, postponing the search for new workers, albeit at the cost of some expenses in terms of employee turnover and absenteeism.

At some point in 2026, the numbers the administration announces about net outflows of immigrants are expected to align with reality, with the understanding that this figure will also include a large number of documented immigrants.

At that point, the labor market will experience shortages in certain sectors, prompting employers to raise wages to fill vacancies, thereby increasing inflationary pressures.

The Impact on Working Women

For example, home healthcare costs are rising at a rate of 12% annually according to the latest data, a rate approaching its highest levels in decades.

This may push some working women to work part-time or exit the workforce altogether to care for their family members, as happened during the pandemic (albeit on a narrower scale).

The decision-making amid uncertainty also explains the stark contradiction in investment in the US economy, where artificial intelligence and related industries are experiencing notable growth, while the rest of the economy shows nearly zero growth.

The boom in infrastructure associated with artificial intelligence is a prominent example of what Nobel Prize-winning economist Robert Solow termed "external technical progress," which typically manifests in the emergence of new technologies encouraging economic growth independent of the usual economic cycle.

Capital expenditures on data centers, advanced chips, and other AI-related equipment have been the main driver of GDP growth in the second and third quarters of 2025.

But why is private investment in the rest of the economy so weak, while the tax system becomes more favorable to it (partially due to provisions in Trump's "beautiful and comprehensive law"); while real interest rates are historically low and likely to fall further due to the Federal Reserve; while corporate budgets are strong and private credit is widely available; while energy prices are declining; while the process of deregulation is ongoing; and while corporate mergers are no longer as obstructed as they were under the Biden administration? It is common to expect a boom in corporate investment under these circumstances.

Once again, the main reason is attributed to the uncertainty induced by policies. Along with changes in trade and immigration policies, Trump's administration's erosion of previous American standards regarding the rule of law, governmental corruption, personal interests, and the provision of technocratic economic and scientific data, as well as the independence of the central bank, are all factors that have their negative effects.

As economists Avinash Dixit and Robert Pindyck have made clear, business managers tend to respond to an increase in uncertainty by cutting capital expenditures on projects like new factories, as these expenditures are largely non-recoverable.

Is the US Experiencing a "Brexit" Moment?

The United States under Trump faces a situation similar to what the United Kingdom faced following the 2016 Brexit referendum, which caused private investment to stagnate for several years, leading to slowed growth.

Investment in artificial intelligence and the potential productivity gains associated with it may offset a significant portion of the contraction caused by the impact of tariffs and deportations that will begin in 2026.

In fact, the stimulus resulting from the current AI boom and more flexible fiscal policies will exacerbate the inflationary pressures stemming from Trump's trade and immigration policies, with labor shortages and imported input shortages becoming more widespread.

The fact that the full effects of Trump's program have not yet emerged does not mean that mainstream economics has been wrong. Rather, it is a signal of how uncertainty can delay or even paralyze the decision-making process.