As this paper is being written prior to the installation of the new administration, it was decided to focus on two aspects of the Trump philosophy: tariffs and immigration. Most people, to the extent they understand either topic, do not connect with them. They are connected in both subtle and overt ways.
Tariffs are a tax on imported goods. The goal of tariffs is to encourage domestic production of what was formerly imported. A good made in the US generates an estimated five times the economic activity of an imported good. This comes from the need to create the raw material, make parts, assemble and ship the finished product. Imported goods come assembled and are shipped once to the dealer for sale. More jobs are created when a good is domestically produced. By taxing imports, the government is providing a buffer for domestic products that will not pay the tariff. Presumably more jobs will result.
Who will be around to fill these jobs is a bit problematic. The administration’s stated goal of mass deportations is already scaring off labor who is trying to flee back across the border. This works at cross-purposes with the desire to staff factories for production in the US. A look at the data reveals that there are not enough people unemployed of working age to pick up the slack left by the fleeing of immigrants from the country.
The current economy, unencumbered by either of the above policy changes, is doing quite well. Employment is high and wages are outpacing inflation. In fact, it is estimated that the population of the country increased by .98 percent in 2024. This is the highest rate of growth since 2000.
Diving into the data, it is estimated that 87 percent of the gain was from immigration. This is because the rate of births by the native population is not enough to sustain growth. In fact, sometime between now and 2030 there will be more Americans over 65 than under 18. This has never before happened in the history of this country.
Usually, this fact is used to highlight the perilous state of Social Security and Medicare. There are other implications to the data as well. A slowing labor force provides fewer new entrants which means fewer workers as well. The tariff argument implies that there are workers who will man the factories replacing imports. By restricting immigration, no such workers exist.
Should tariffs be introduced and no rise in domestic production result, the tariffs will function as a de facto national sales tax on imported goods. Consumers will be aware of the price rise but will not always be apprised to the source. The tax will fall on the poor disproportionately as they spend a greater percentage of their income on goods and have less to set aside to invest. The tariff revenues are earmarked for extending and increasing the tax breaks that were first introduced by Trump in 2017. At this writing, the tariff rate will be 10 percent minimum, with certain countries like China being targeted with rates as high as 60 percent. If enacted, these will not be insignificant amounts.
Aggressive immigration enforcement will likely be a second source of inflation. It is estimated that in certain industries (construction, health care staffing, farming, food processing, to name a few), immigrants make up 40-70 percent of the work force. The current unemployment rate of less than 4 percent does not provide enough slack to replace those who will be forced to flee. The disruption to the economy will be significant in our view.
Some are saying that these positions by the new administration are simply negotiating postures. Given how many of Trump’s followers are fervent adheres of a philosophy embracing both these topics, there in more risk to Trump in not addressing the issues. There does not appear to be a way he can skate by them. In Trump’s world, tariffs are paid by foreign makers as a price for access to the American market. They won’t cost his supporters a dime.
As for being anti-immigration, this is a stand that has existed almost as long as the country has been in existence. During the Potato Famine in Ireland in the 1840s which led to an exodus of Irish to America, some anti-immigrants at the time argued that the Irish were not white as a way to exclude them.
The bottom line is that this country was founded by immigrants. America’s population growth and economic and military power depends on an expanding population. To exclude or deport immigrants is to also reject their financial contribution to the country and the country’s economic future in turn. Be careful what you wish for.
The Economy
Economic activity is good. Some slowing is to be expected at this stage of the economic cycle, but overall employment and GDP numbers point to an expansionary environment.
This may be disrupted by whatever policies are proposed and enacted by the incoming administration. Because of this change of direction, most forecasts for the year have to be taken with a grain of salt. At this point it would seem that there is a great deal of uncertainty as to the direction and priorities of the new economic team taking over.
Inflation
Inflation is expected to be higher for the year compared to 2024. A combination of a lack of skilled labor with no legal channel for importing the same along with higher prices for any number of imported goods will make efforts to reduce inflation a losing proposition.
There is a school of thought that believes that the elimination of government waste will reduce the deficit and inflation through reducing demand. With almost 80 percent of the budget accounted for by Social Security and Medicare payments, the ability to find excessive spending is not really there.
The one area of reduction so far is the enforcement division of the IRS. However, the IRS has documented that every dollar spent on enforcement results in five dollars in additional taxes collected. The drive to reduce IRS enforcement can be seen as less driven by cost savings and more by protecting the wealthy from audits.
Interest Rates
Interest rates are assumed to be going up in 2025. Even if $2 trillion in savings were to be found in the budget, the number would still leave the government in the red after the proposed tax cut extensions and new cuts are enacted. Thus, the need to keep raising interest rates to attract the funds required to fund government shortfalls and reissue bonds as they are rolled over.
The Stock Market
While gains in the stock market did expand after the elections, the breath of advances has again narrowed. Commentators who once spoke of the “magnificent seven” stocks now have narrowed to the magnificent one: Nvidia.
As for the year: the volatility in stocks will likely increase due to the changes in the political and economic direction of the country. It is too soon to say if the disruptions will be temporary or longer. It would be prudent for investors to review their holdings to make sure that what is being held can stand the market upheavals to come.
Warren M. Barnett, CFA
January 9, 2025
© 2025 Barnett & Company, Inc.
All rights reserved.
Financial Services Offered
At Barnett & Company, we understand that your financial future is not just numbers on a balance sheet—it’s your dreams, your hopes, and your legacy. Our passionate team is dedicated to crafting comprehensive financial planning services that align with your unique aspirations. Whether it’s managing your assets with utmost care or creating a thoughtful estate plan to protect what matters most to you, we are here to guide you every step of the way. Take a bold step toward securing your future—visit barnettandcompany.com to learn more or reach out to Jessica Bingham at 423-756-0125. We can’t wait to partner with you on this journey!
Barnett & Company is a fee-only investment adviser registered with the U.S. Securities & Exchange Commission. Registration does not imply a particular level of skill or training. Investing involves risk, including potential loss of principal. This document does not constitute advice or a recommendation or offer to sell or a solicitation to deal in any security or financial product. Certain information contained herein constitutes “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events, results or actual performance may differ materially from those reflected or contemplated in such forward-looking statements. Nothing contained herein may be relied upon as a guarantee, promise, assurance, or a representation as to the future. Barnett provides services designed with the investment and financial planning needs of individual and organizations in mind. Those wishing to discuss their investments and financial plans with Barnett & Company and have investable assets of $500,000 or more should contact Jessica Bingham at 423-756-0125.