The escalating trade war with China is currently somewhat on pause. In October, the Trump administration eased tensions by reversing its decision to expand the list of Chinese companies restricted from accessing advanced American technology. Earlier this month, Trump said he would allow Nvidia to export some high-end computer chips to China, with the US government receiving twenty-five percent of the proceeds. Wall Street seems to be tacitly assuming that détente will last beyond Trump's planned trip to China in April, but who really knows? If the government in Beijing doesn't agree to the concessions he wants, he could easily revert to a harder line.
Even if the economy can survive another year of the tariff minister, there are other issues that could have a big political impact. These include jobs, prices and health care costs. Since April, employment growth has averaged just forty thousand jobs per month. Last year this figure was more than four times higher. Moreover, Powell stated that the Fed believes that official monthly wage data overstates the real numbers by about sixty thousand. If this is true, then the economy is losing twenty thousand jobs a month. Even based on official data, the number of people working in manufacturing, the sector believed to be the main beneficiary of Trump's tariffs, has fallen by sixty-three thousand this year. Other industries that have seen weak hiring recently are information and finance, which employ many white-collar workers. This has raised concerns that AI is eliminating jobs. In a Reuters/Ipsos poll, seventy-one percent of respondents said they were concerned that AI would “put too many people out of work forever.”
Trump can't be blamed for creating artificial intelligence, although an executive order he issued two weeks ago in an attempt to stop states from regulating the potentially transformative new technology showed how beholden he is to Silicon Valley tech moguls.
It is more directly responsible for persistently high prices. His tariffs have helped raise the prices of many imported goods, including staples such as coffee and bananas, and his mass deportations could lead to labor shortages in some service industries such as restaurants and hospitality, where there were nearly a million job openings in the fall. When firms struggle to find the workers they need, they have to offer higher wages, which increases their costs.
As the midterm elections approach, Democrats are sure to heed Barack Obama's advice to focus on affordability, jobs and health care. Since Congress adjourned without debating the year-end expiration of expanded subsidies for health insurance policies purchased through the Obamacare exchanges, approximately twenty-two million Americans will be affected. In 2026, many could face much higher insurance premiums, in some cases more than doubling. With Republicans divided and Trump still doing nothing but publicly criticize Obamacare, there is no guarantee of any resolution.
Meanwhile, Trump's presence in the White House highlights another big threat to the economy, which comes from financial instability. Over the past three years, the S.&P.500 index has risen more than seventy-five percent, and the Nasdaq index has more than doubled. Historically, stocks have traded at very high levels relative to earnings, and investors have borrowed record amounts of money to buy these stocks. Based on optimistic revenue and profit assumptions, AI companies are increasing huge amounts of money, in many cases from each other. And despite the revenue from Trump's tariffs, the US government runs a budget deficit of about six percent of GDP.
Whether this situation should be classified as a financial boom or a bubble is largely a matter of terminology. The key point is that the financial system is vulnerable to unexpected disruptions and, as the Bank of England recently noted, risks are growing. One might imagine that the shock could come from the artificial intelligence complex, or from the private lending sector, where hedge funds, private equity firms and other non-bank lenders are expanding their lending very quickly, or from Trump himself, as he tries to expand his power over the Federal Reserve, an institution whose independence many investors here and abroad consider the main guarantor of financial stability. Powell's term as Fed chairman ends in May, and Trump is set to announce a replacement early in the New Year. Kevin Hassett, who heads the National Economic Council in the White House and frequently appears on television defending Trump's policies, is the favorite to win the job, despite speculation on Wall Street that he would be too weak.
