Governmental Structural Changes to the U.S. Economy Are Underway – What to Expect

February 18, 2025

Ted Herzog - Tonkon Torp LLP

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I attended the American Seniors Housing Association (ASHA) convention in Phoenix last month. The agenda featured an address by Rob Kaplan, Partner and Vice Chairman of Goldman Sachs, and former President and CEO of the Federal Reserve Bank of Dallas. Kaplan’s insightful and topical presentation on “Five Big Structural Changes to the U.S. Economy” highlighted the following areas of economic change:

1. Government Spending. Since 2019, the U.S. Congress has passed, and consecutive presidential administrations have implemented, about $6 trillion in spending programs, starting with the CARES Act in response to the COVID-19 pandemic, the American Rescue Act, the Inflation Reduction Act, and the CHIPS Act. The federal debt as a percentage of GDP was about 75% in 2019. That same year, the federal budget deficit was about 4% of GDP. While CARES provided a safety net for many people and businesses, it increased the federal budget deficit to about 15% of GDP. This was the first economic downturn in U.S. history to see GDP decrease while consumer spending increased.
   
   The Trump administration aims to reduce the budget deficit from its current range of 6-7% of GDP to 5%. It is serious about making rapid changes, including by freezing previously-approved spending and reducing future federal spending, to emphasize private sector drivers and reduce government influence on the overall economy. This could be jarring to the economy, causing lower growth, particularly in the short and middle term.
   
   An objective measure to watch is interest rates on longer-term U.S. treasuries. Currently, the yield on 10-year treasuries has increased even while the Fed Funds Rate has decreased. This is true of all longer-term U.S. treasuries, showing that the market is skeptical and reluctant to buy “duration” – interpreted to mean that Treasuries buyers don’t bet on U.S. interest rates staying at their current rates or decreasing for the long term. U.S. residential mortgage rates correlate with 10-year and 30-year U.S. treasury rates, so continued reluctance to buy duration means residential mortgage rates will stay higher than the administration and consumers would like.
    
2. Goal to Reduce Energy Costs. The Trump Administration wants to quickly reduce energy costs for American consumers. Expect a reversal of any federal policy that has the effect of reducing the availability of fossil fuels or favoring renewables. The price of gasoline for consumers is a substantial component of inflation and is very important to the estimated 65-75 million Americans living in households making less than $50,000 per year.
    
3. Regulatory Reduction Across All Industries. The Trump Administration desires to reduce governmental regulation of all American industries. Their goal is to increase productivity across the board. GDP growth equals workforce growth plus productivity growth. With the country’s demographics showing a slowing birth-rate (and therefore a diminishing future workforce), the administration desires to increase productivity by reducing regulations.
    
4. Immigration. How far will the Trump administration go with respect to deportations? Given our demographics, the U.S. economy requires incoming immigration for workforce growth. Many undocumented workers work in service industries. Their lower wages have mitigated inflationary pressures in that sector. As many as 50% of construction workers are undocumented, and the percentage of undocumented workers in agricultural sectors exceeds that percentage. As things currently stand, many construction and agricultural jobs are already unfilled – this shortage will likely increase the more widespread deportations are.
    
5. Tariffs. Will the Trump administration use tariffs as a negotiating tool with certain countries, or will they be longer-term (or even permanent) across-the-board taxes? Economists will be closely watching what the administration does with tariffs, in particular with two of our most important trading partners, Canada and Mexico. Many imports from Canada and Mexico are component parts used by U.S. manufacturers to assemble products in the U.S., so increases in costs of those component parts will increase the cost of the products assembled in the U.S.

To summarize Kaplan’s speech, the Trump administration desires a more organic, private-sector-led economy with less government influence. However, its use of deportations and tariffs will work against its goals for GDP growth and reduction in inflation. For the U.S. economy to grow through these structural changes will require careful thought and close attention to many moving pieces. It is quite possible that economic growth will slow, or that we’ll experience a downturn. In addition, Americans should recognize that some things to which we have become accustomed, such as federal grants for public goods and services and federal regulatory oversight of certain industries, are likely to end as a result of the administration’s views on what the economy should be and how it should work.

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