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Dow Jones NewsFeb 12, 11:25 PM UTC
MW 'Stagflation-lite?' Economy may face fresh threat of slower growth and rising inflation.
By Jeffry Bartash
Trump vows to unleash U.S. economy, but his agenda is creating lots of uncertainty
The U.S. faces little chance of a recession and resurging inflation in the short run, but what about "stagnation lite?" Some economists say the risk is growing.
What exactly is "stagflation lite?"
One economist who's adopted the term is Paul Ashworth, North American economist at Capital Economics. He described it to MarketWatch loosely as low or no growth in gross domestic product and 3%-plus inflation.
"Stagflation-lite is a really useful phrase to describe what could happen," he said.
The origins of the word stagflation harken back to the chaotic period for the U.S. economy from 1974 to 1982. The U.S. experienced four declines in annual GDP during that nine-year period, with inflation peaking at 13.5% in 1980.
No one on Wall Street DJIA SPX is predicting a return of those tumultuous times, mind you, and even Ashworth doesn't think stagflation-lite is the most likely outcome for the U.S.
Capital Economics predicts GDP will grow just under 2% in 2025 and inflation will range from 3% to 3.5% - hardly terrible numbers historically by any stretch.
Other forecasters see GDP expanding just above 2% this year and inflation running somewhat below 3%.
What's raising the anxiety among economists - and businesses - is the uncertainty spawned by the Trump White House.
The on-again, off-again tariff threats make it harder for businesses to invest, for one thing. They can't finalize plans until they know how much it's going to cost to obtain supplies, many of them imported from other countries.
"It is clear that Trump is a lot more serious about tariffs [than in his first term]," Ashworth said.
Tariffs could also boost inflation if President Donald Trump raises them sharply on a wide range of goods and keeps them in place for an extended period - no sure thing given his proclivity to use them as a negotiating tactic.
Inflation is already problematic enough. The yearly rate of inflation based on the Federal Reserve's preferred PCE price index stood at 2.6% in December, but early indications suggest prices rose sharply at the start of the year.
Put simply, inflation is moving away from the Fed's 2% goal.
The crackdown on immigration, whatever its merits, could also weigh on the U.S. economy.
How come? The native-born labor force is growing at the slowest rate ever. If immigration levels fall sharply or decline outright, the pool of labor would dry up.
Businesses would then have to either pay more for labor or invest more in labor-saving technologies, often at higher tariff-induced prices. Either way, inflation could rise.
The impact on GDP could also be significant.
If employment growth slowed to a crawl, there would be fewer new workers earning paychecks and spending money. Consumer spending accounts for 70% of everything that goes on in the economy.
Consumer spending has been on a tear lately, fueled in small part by massive immigration. All those newly arrived people, whether in the country legally or not, have been spending money and adding to GDP.
GDP grew a faster-than-expected 2.9% in 2023 and 2.5% in 2022, well above what's considered the top sustainable speed for U.S. economic growth. GDP increased at a similar pace in 2024, though final numbers haven't been published yet.
The remaining wild card is government spending and taxation under Trump.
Government spending has been the third of three legs holding up the U.S. economy. Even if sharp cuts to the federal budget are warranted, the effect will be another drag on the economy.
On the flip side, Trump plans to extend tax cuts from his first term and create new tax breaks. The effect could be to prop up GDP - but also add to inflation if the economy actually gains speed.
All of these moving parts mean the Federal Reserve is done cutting interest rates for now.
"The Fed is also watching the impact of higher tariffs, more restrictive immigration policies, and tax cut plans," chief economist Bill Adams of Comerica said.
"These policies could all add to inflation as their effects ripple through the economy, causing the Fed to keep interest rates higher than they would have been under the status quo."
-Jeffry Bartash
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
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02-12-25 1825ET
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