It's An Uncertain, Uncertain, Uncertain, Uncertain World

The one certainty? Uncertainty is bad for the economy.

Photo by Jon Tyson on Unsplash

Last weekend the New York Times’ Steve Rattner noted that despite some disturbing warning signs for the economy — more on those in a moment — his Wall Street friends were pretty happy with Donald Trump’s second-term performance: “many, maybe even most, of the people… are still quietly cheering his move-fast-and-break-things approach — even if they are starting to feel doubts about specific issues, particularly Ukraine and tariffs.”

I wonder how Rattner’s friends are feeling this week. On Tuesday president Trump followed through on his previous threats by raising tariffs on Canada, Mexico, and China. It’s worth reading a few paragraphs from Politico’s Victoria Guida on the implications of those tariff hikes:

Trump’s move to shatter supply chains across North America is a stunning development, no matter how foreseeable, and it’s changing the U.S. outlook fast. The U.S. economy was not entirely out of the inflation woods when Trump took office, but steady consumer spending and a low unemployment rate normally provide a healthy buffer against smaller economic shocks.

But throwing new tariffs on top of broader policy uncertainty and potential economic ripple effects from Elon Musk’s Department of Government Efficiency will mean a hit to growth. The question is how large of a hit it will ultimately be….

Renaissance Macro’s Dutta told me it’s telling that Trump still followed through even though markets were shaky before he committed to tariffing Mexico and Canada. He pointed to the expectation that Powell will only let markets drop so much before intervening — known in investor circles as “the Fed put,” a reference to a type of bet known as a put option — and said there was also a “Trump put.”

“We’re trying to figure out, where is the Trump put, and where is the Fed put?” Dutta said. “In both cases, they might be a little lower than where we think.”

A day later, there was a reprieve of sorts for the auto sector. The Washington Post’s David Lynch and Aaron Gregg reported on some of the confusion created by that move:

The president’s decision followed a phone conversation with executives from the Big Three automakers — General Motors, Ford and Stellantis — who sought relief from the new import taxes. Each of the automakers over the past several decades has developed complex supply chains that cross North American borders multiple times before delivering a finished product.

Along with disrupting those supply lines, Trump’s tariffs would have increased the cost of the typical new car by more than $10,000, industry groups said. Ford CEO Jim Farley warned last month that the president’s tariffs “would blow a hole in the U.S. industry” and give Asian and European producers a distinct competitive advantage….

Karoline Leavitt, the White House press secretary, announced the one-month delay at midday Wednesday. She said that vehicles complying with the 2020 United States-Mexico-Canada Agreement would face no new tariffs, at least until Trump’s plan to implement a new system of tit-for-tat “reciprocal” tariffs takes shape next month….

Asked if Trump expected automakers to relocate during the next month, Leavitt said yes.

“He told them they should get on it, start investing, start moving, shift production here to the United States of America, where they will face no tariff. That’s the ultimate goal,” Leavitt told reporters….

Dramatic increases in U.S. automaking capacity will not happen quickly or inexpensively. “You’re talking billions of dollars to build a new assembly plant and a two- to three-year lead time,” Hurles said….

The president’s erratic conduct of trade policy — threatening, imposing, delaying and modifying tariffs seemingly on a whim — has angered some of the closest U.S. allies. Trump’s latest switch, lifting a burden from the continent’s auto sector, but only temporarily, drew little applause.

“Yes, this is good news, but let’s bear in mind, trust was damaged, and that won’t be recovered in a day. Without trust, no one wants to take risks, investment goes down and there is no prosperity,” Mariana Campos, the director of México Evalúa, a prominent Mexican think tank, posted on X.

After autos won a carve-out, other sectors are seeking to lobby Trump for similar exemptions.

Discerning readers should have noticed the repeated use of “risk” and “uncertainty” in describing the current economic environment. Part of this might be due to the muddled and contradictory reasons Trump has proffered for the tariffs.

The uncertainty premium is now so elevated that Politico’s reporters raised in their discussion of the temporary auto reprieve:

Two days in, his decision to announce a carve-out for automakers has left industries, market analysts and consumers confused and flustered as they try to figure out where he is going next.

“I don’t know what the administration’s plan is,” said Sen. Rand Paul (R-Ky.). “If they’re using [tariffs] as leverage, seems to me it would be better to threaten them, negotiate and you put them on or not on.”

Together, the conflicting actions reflect the president’s dual impulses: longstanding sensitivity to stock market fluctuations — which he has long read as Nielsen ratings for his performance — and a love of tariffs as a primary instrument to get what he wants from foreign governments.

That tension is also reflected within Trump’s circle of advisers, who spent much of Wednesday debating whether and how far to mitigate the impacts of a trade war on American industries and consumers.

“It’s the greatest show on Earth. We’ll put tariffs on tonight, but tomorrow we’ll tell you we may negotiate and take them off,” a person close to the administration, granted anonymity to discuss internal conversations, told POLITICO. “But stay tuned, because you never know what tomorrow’s gonna bring.”

That last quote is something, because it implies that for the Trump team all of this is mere entertainment. And no doubt, massive economic uncertainty generated by presidential whim forces the media and the markets to pay ever more attention to Donald Trump.

The problem is that by at least one metric — the Economic Policy Uncertainty Index — the United States has reached an all-time high in the 21st century:¹

It’s not just that metric either:

That’s right — the current moment has more economic uncertainty that the pandemic, than the 2008 financial crisis, or the September 11th terrorist attacks.²

The one thing I am certain about is that this much uncertainty and volatility is bad for the economy.³ Any significant long-term capital investments require at least some degree of future predictability. Trump and his partner-in-crime Elon Musk are doing the exact opposite of that. They seem hell-bent on governing in a state of permanent revolution — a dynamic the hard-working staff here at Drezner’s World will be revisiting soon.

In the meantime, another way that Trump might inject more uncertainty into the economy is by scuttling or censoring the economic data that investors need to understand the current state of the economy. Vox’s Eric Levitz explains:

Trump’s constantly shifting tariff threats indicate an indifference to providing business owners with clarity about the economy’s future trajectory, while his entire history as a public figure suggests an indifference to the truth.

All this gives us some cause for fearing that Trump might tamper with government economic data, should it become politically inconvenient. And over the weekend, Commerce Secretary Howard Lutnick suggested that he intends to do just that, by altering how the government calculates gross domestic product (GDP) — the total value of goods and services produced in the economy.

Lutnick’s remarks came days after Elon Musk argued that “A more accurate measure of GDP would exclude government spending” since “Otherwise, you can scale GDP artificially high by spending money on things that don’t make people’s lives better.”

In other words, Musk believes that the US government has been producing useless goods and services just to inflate GDP numbers.

This argument is substantively unsound. And it also appears politically motivated: Musk’s comments came in response to a new projection from the Atlanta Federal Reserve, which showed GDP on pace to decline during the first quarter of this year. Musk’s implication was that this projected decline is entirely attributable to his elimination of wasteful government activities that had been distorting growth statistics.

The objections that Lutnick and Musk have raised about measuring GDP are old and very rusty saws. As Axios’ Neil Irwin explained, “There are flaws and limitations in how government GDP statistics account for government spending. But they are well-known, transparent and the kinds of things economy-watchers can adjust for as they wish.”

So, to sum up: Donald Trump is injecting a massive amount of policy uncertainty into the U.S. economy. His minions are meddling with the statistics that might indicate that the uncertainty is negatively affecting the U.S. economy. And the only certain thing about the near future is… more uncertainty.

That bodes poorly for the U.S. economy for the rest of 2025.

1. That uncertainty and complexity of U.S. tariffs will grow even more when the country-specific reciprocal tariffs are supposed to be implemented next month.

2. How can that be? Trump is certainly unpredictable, but a glance at the index methodology reveals that the possible expiration of his tax cuts is a big driver.

3. It’s also horrible for foreign policy. As Politico’s Nahal Toosi noted after Trump’s marathon joint address to Congress, “What Trump has inspired so far, and ensured would continue for now through his speech, is a period of disorientation. Washington’s friends and foes are being forced to adapt to a U.S. president who creates his own reality, who changes it on a whim and who doesn’t care as much as people thought he would about reality checks, like, say, plunging stock markets.”