Scenarios: Navigating Economic Futures

As the new administration takes the helm, the economic landscape is poised for significant shifts. Various scenarios have emerged, each with distinct implications for trade, immigration, and overall economic growth. Understanding these scenarios is crucial for businesses, policymakers, and consumers alike as they navigate the complexities of a changing economic environment.

Baseline Scenario (50%): A Cautious Approach

In the baseline scenario, the administration is expected to adopt a measured approach to implementing its campaign promises. While new tariffs on China and selective tariffs on other trading partners are anticipated, Canada and Mexico are likely to remain exempt. This scenario also spares essential goods such as food and energy products from tariffs, recognizing the potential backlash from rising food prices—a significant factor in the recent election outcome.

Deportations are projected to increase, but not to the extent that would lead to millions being removed from the country. This cautious stance is likely influenced by the agricultural sector’s reliance on undocumented workers, which could exacerbate food price inflation and voter discontent. Government spending cuts will be enacted, but they are not expected to drastically alter the economic trajectory. Tax cuts from the Tax Cuts and Jobs Act (TCJA) will be extended, and the Federal Reserve is anticipated to maintain its independence.

In this scenario, businesses and individuals may rush to engage in trade activities in 2025 to circumvent impending tariffs, leading to a projected 3.2% growth in exports and 4.4% growth in imports. However, once tariffs are fully implemented in 2026, growth in both exports and imports is expected to slow to just 0.7%. Inflationary pressures from tariffs will likely prompt the Fed to pause rate cuts until mid-2027. Consumer spending is projected to grow by 3.1% in 2025 and 2.3% in 2026, but overall growth will average only 1.8% per year thereafter, constrained by reduced population growth due to increased deportations. Real GDP growth is forecasted at 2.4% in 2025, tapering to 1.7% in 2026, with subsequent years showing modest growth between 1.9% and 2.1%.

Tax Cuts, Trade Deals, and Deregulation (30%): Optimistic Growth

The second scenario envisions a more optimistic economic outlook, driven by tax cuts and deregulation. Following the election, markets reacted positively, reflecting investor confidence that the new administration could catalyze growth through fiscal policies. In this scenario, the TCJA tax cuts are extended, and the corporate tax rate is reduced to 15% for domestic producers, spurring increased investment. This influx of capital, coupled with the successful integration of innovative technologies like artificial intelligence, is expected to ignite a productivity boom.

Minimal new tariffs are anticipated, as the administration may leverage the threat of tariffs to negotiate favorable trade deals. Additionally, businesses are likely to advocate for limited deportations to keep prices stable.

As a result, GDP is projected to grow at an average annual rate of 2.7% from 2025 to 2029, surpassing the baseline forecast by 0.7 percentage points. With fewer tariffs in place, inflation is expected to remain lower than in the baseline scenario, leading to stronger consumer spending starting in 2026 and a reduced merchandise trade deficit. However, the inflationary effects of tax cuts may push inflation to settle around 2.3% per year by the end of the forecast period. The labor market is also expected to benefit, with a rise in labor supply and employment, mitigating the impact of deportations on the workforce.

Accelerating Inflation and Shrinking Population (20%): A Pessimistic Outlook

In contrast, the third scenario presents a more dire economic forecast, where the administration fully implements its more aggressive policy proposals. This includes imposing substantial tariffs—60% on all goods from China and 20% on goods from other trading partners—resulting in a significant decline in both exports and imports. Such drastic measures could lead to a broader economic slowdown.

Under this scenario, deportations could escalate to 1 million people per year, and legal immigration levels may be halved, resulting in a shrinking U.S. population by 2029. Additionally, a staggering $1.35 trillion cut from federal government spending would be achieved through deep reductions in Medicaid, Social Security, and income security programs, severely impacting the living standards of millions.

Economic growth is expected to decelerate to 1.6% in 2025, followed by a contraction of 2.1% in 2026, mirroring the recessions experienced in 2009 and 2020. The economy may struggle to recover, with rising trade tensions and stringent immigration policies stifling consumption growth. Inflation is projected to rise, peaking at 3.7% in 2026 before gradually easing to 3% by the end of the forecast period. In response to these inflationary pressures, the Fed may initiate a new rate hiking cycle in 2026, only to reverse course and ease monetary policy in 2027.

The anticipated economic downturn in this scenario is not unexpected. While tariffs aim to re-shore manufacturing to the U.S., the benefits of such policies are unlikely to materialize in the short term. The mass deportations would significantly impact industries reliant on undocumented labor, such as agriculture and hospitality. Furthermore, substantial cuts to government spending and transfers would negatively affect the macroeconomy in the near term.

Each of these scenarios presents a unique set of challenges and opportunities, shaping the economic landscape in the years to come. As the new administration navigates its policy agenda, the implications of these scenarios will resonate across various sectors, influencing decisions made by businesses, consumers, and policymakers alike.