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President Joe Biden is leaving his successor Donald Trump a strong economy, possibly the best presidential handoff since George W. Bush took office in 2001.
Unemployment is low, COVID-era disruptions are largely over, and consumers seem to have spending power to keep the party going. The Yahoo Finance Bidenomics Report Card rates the Biden economy an A-, based on a matrix of economic data for first-term presidents going back to Jimmy Carter in the 1970s. Hardly any economists foresee a recession during the next 12 months.
That’s the good news.
On the other side of the ledger, however, are concerns. Trump will face at least three economic challenges during 2025: a possible resurgence of inflation, surprisingly high interest rates, and a gigantic national debt that’s finally starting to vex markets. Trump will also grapple with waning economic dynamism, as a confluence of factors keep GDP growth well below the 3% rate Trump’s incoming Treasury secretary, Scott Bessent, is aiming for.
Trump certainly escaped the worst of inflation, which peaked at 9% in 2022. It’s now down to 2.9%, with shopper sticker shock largely in the past. But the Fed wants inflation at 2%, and the “last mile” of this journey is turning out to be arduous. Inflation was down to 2.4% last September, when the Federal Reserve felt comfortable enough to start cutting short-term interest rates. Inflation has ticked back up since then, and the odds of further Fed rate cuts in 2025 are rapidly declining.
This is one factor fueling the rise in long-term rates such as the 10-year Treasury bond, which in turn sets rates for mortgages and most other consumer and business loans. Long-term rates have actually risen by 1 percentage point since last September, even though the Fed has cut short-term rates by a point since then. Among other things, higher rates are exacerbating the housing affordability problem, one thing that got worse, not better, under Biden.
Another factor pushing long-term rates higher is the $36 trillion national debt, which finally seems to be causing ripples among investors.
Massive amounts of Treasury issuance are raising concerns about how much longer the US government can borrow at current unsustainable levels. Nobody worries that the United States will go broke. But investors perceive more long-term risk than they used to, which pushes rates higher to compensate for the perceived risk. Bond-market wobbles could also interfere with tax cuts and other legislation Trump wants Congress to pass if they add even more to the debt and trigger additional adverse bond-market moves.
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