If “uncertainty” was the defining theme of the early stages of Trump 2.0, “banana republic” is rapidly becoming the catchphrase for the second half of the year.
None other than former treasury secretary and Federal Reserve chair Janet Yellen, who is certainly not prone to hyperbole, has recently been quoted on several occasions warning that increasing political interference in economic policymaking and data collection “is the kind of thing you would only expect to see in a banana republic”.
Her most recent warning was prompted by events on August 1, when the release of the July nonfarm payroll jobs number forced a stark reassessment of the toll that Trump’s erratic policymaking is taking on the US economy. Rather than review his policy stance, Trump opted to fire the labour statistics chief responsible for the data.
Not only did the economy create fewer jobs than expected in July, but the employment numbers for both May and June were revised sharply lower. According to Bloomberg, these revisions brought the average pace of hiring over the past three months to just 35,000 — the slowest pace of employment creation since the pandemic.
For economists, the data provided confirmation of what they had long expected: that the uncertainty generated by Trump’s increasingly erratic trade tariffs, immigration crackdown and the culling of federal workers led by the department of government efficiency was taking a toll on economic growth. Finally, July’s numbers provided the long-awaited hard data to confirm the slowdown which had thus far only been evident in soft data releases, such as consumer confidence and economic sentiment surveys.
Analysts note that nonfarm payroll data is frequently subject to revisions, since the preliminary reports are based on incomplete data. Once more data becomes available, these reports are revised.
However, Trump responded to the unexpectedly weak employment data by denouncing it as “rigged” and politically motivated, and immediately fired Bureau of Labor Statistics (BLS) head Erika McEntarfer. Trump’s decision ignored the fact that McEntarfer had been confirmed in January 2024 with overwhelming bipartisan support, in an 86-8 Senate vote that included Trump Republican cheerleaders such as JD Vance and Marco Rubio.
Trump’s economic adviser, Kevin Hassett, justified the decision, arguing that the president wanted his “own people” at the BLS to ensure “more transparent and reliable jobs reports”.
Later the same day came news that Fed governor Adriana Kugler would be stepping down before her term was scheduled to end. This has allowed Trump to temporarily appoint Stephen Miran, author of the so-called Mar-a-Lago Accord (a proposed initiative to weaken the dollar while preserving its reserve status, aimed at reducing the US trade deficit and boosting domestic industry).
By appointing Miran, a fierce critic of Fed chair Jerome Powell, Trump will be better positioned to increase political pressure on the Fed — the world’s most influential central bank — to cut interest rates more aggressively.
Powell has cited Trump’s tariff policies as a key reason for delaying interest rate cuts this year. At the late-July federal open market committee (FOMC) meeting, the Fed again left rates unchanged, pointing to the resilience of the labour market as evidence that the economy could withstand the Fed’s wait-and-see approach as it assessed the inflationary impact of the tariffs.
Had the latest jobs data been released before that FOMC meeting, the Fed may well have opted to cut interest rates. Now, however, any rate cut will be tainted by the assumption that the fiercely independent Fed is capitulating to political pressure, thus undermining the credibility of its policymaking decisions.
Nonetheless, the reality of the weak labour market has led to a significant shift in interest rate expectations, with markets now seeing a high probability of a 25 basis point cut at the September FOMC meeting, with the possibility of at least one further rate cut before year-end.
However, just as signs of labour market weakness suggest the Fed should consider resuming its stalled rate-cutting cycle, evidence is emerging that Trump’s trade tariffs are indeed fuelling inflation.
Higher tariffs have taken some time to filter through to consumer prices. Faced with the prospect of punitive import duties, many companies rushed to stockpile inventories of imported goods. Until recently, most firms have shielded consumers from price hikes, either by drawing down existing inventories or absorbing the additional tax, in the hope that Trump might reverse the threatened tariffs (the so-called Taco trade — Trump always chickens out), or that other nations might negotiate more favourable trade deals with the US.
However, with inventories exhausted and many of those punitive tariffs now in effect, businesses have run out of options and are forced to pass on higher import prices to their consumers.
In a recent Substack post, Nobel laureate Paul Krugman notes that the Institute of Supply Management nonmanufacturing (services) purchasing managers’ index (PMI), a historically solid inflation predictor, suggests that “a nasty shock — inflation of 4% or more — is just around the corner”.
These inflationary impulses are being reinforced by Trump’s crackdown on immigration. After just a few months of Immigration & Customs Enforcement deportations, the number of foreign-born workers in the US is already shrinking, reversing several years of rapid growth. In sectors such as agriculture and construction, which rely heavily on migrant workers, these crackdowns are causing labour shortages and supply disruption, further fuelling inflationary pressures.
These inflationary impulses are being reinforced by Trump’s crackdown on immigration
As Krugman notes in his post, ever since “liberation day” on April 2, when Trump announced the tariffs, there have been warnings that the US economy is heading for stagflation. While Krugman had little doubt that the tariffs would be inflationary, he was, in his own words, “less sure about the stag”. Recent data releases are beginning to change his mind.
Even with tariffs deep in the territory of the Smoot-Hawley Tariff Act (in the 1930s, import tariffs were raised by 40%-60%), Krugman argues that economists have a tendency to overstate the damage done to the economy by protectionism. While the uncertainty about tariffs is likely to depress economic activity in the short term, both Krugman and the Yale Budget Lab estimate that Trump’s tariff regime is likely to result in a GDP growth rate persistently 0.4% lower than it would have been without tariffs.
Krugman argues that the only thing preventing a more serious economic slowdown is the boom in AI-related investments. Google, Amazon, Microsoft and Meta alone plan to spend more than $350bn this year on data centres to satisfy the tech industry’s exploding demand for processing power.
It is estimated that investment in data centres contributed more to US economic growth during the first half of the year than all consumer spending combined — a notable achievement, given that consumer spending typically accounts for about two-thirds of total US GDP.
While the AI investment boom is helping to mask the negative effects of Trump’s chaotic economic policies, these benefits are likely to be short-lived. Once the construction phase has been completed, these billion-dollar data centres may end up employing only about 100 people each, while the long-term impact of AI investments on economic growth and productivity remains unknown.
Even with the AI boom, the US economy is clearly slowing. Using annualised growth per half-year (to prevent the Q2 2025 import surge distorting quarterly data), there has been a clear slowdown in growth under Trump’s erratic leadership. At current levels, the services PMI suggests an annualised increase in real GDP of just 0.5%. This is close to what Goldman Sachs calls “stall speed” — a pace below which the labour market weakens in a self-reinforcing fashion.
There is, however, one surprisingly positive aspect to Trump’s tariffs. In the year to July, revenue from taxes collected on imported goods generated $152bn, about double the revenue collected over the same period last year. According to Trump, this is evidence that his trade policies, which others argue are set to push the US towards stagflation, are “a win” for America.
Trump’s tariffs could generate more than $2-trillion in additional revenue over the next decade, which would help plug the $3.4-trillion hole created by the tax cuts included in the One Big Beautiful Bill Act (OBBBA). For a heavily indebted country such as the US, tariffs could provide a substantial source of income that policymakers might find increasingly difficult to resist.
Trump has long wanted to replace taxes on income with trade tariffs, pointing to US fiscal policy in the late 19th century (when the government operated without an income tax and relied primarily on tariffs) as a model for the future.
However, much like the OBBBA, a shift from income tax to trade tariffs would be regressive. While cutting taxes on income is most beneficial for wealthy Americans (who earn the most), tariffs on imported goods raise the cost of everyday items, which account for a larger share of lower-income households’ spending.
As Trump’s policies take the US back to the economic nationalism of the 1930s and the 19th century — or possibly even the economic and political instability typical of a banana republic — global attention is quietly shifting away. America may continue to dominate global media headlines, but the rest of the world is gradually reorienting itself around a new geopolitical and economic order — one that is emerging without the US.
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