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UM Economic Forecasts Predict Bigger Deficits Under Trump, But No Disaster

Posted on by L. Dreeye
UM Economic Forecasts Predict Bigger Deficits Under Trump, But No Disaster

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Economists at the University of Michigan expect the federal deficit to widen in the coming years following Donald Trump’s return to the White House and Republicans in full control of Congress, but they don’t foresee any economic disaster on the immediate horizon.

UM on Thursday released its annual economic forecasts for the U.S. and Michigan at the university’s 72nd annual Economic Outlook Conference. The forecasts take into account the usual expected developments, such as further interest rate hikes by the Federal Reserve, as well as some dramatic policy changes that could occur under the next Trump administration, such as much higher tariffs on Chinese goods and an end—or at least cuts—taxes on tips, overtime and Social Security benefits.

Overall, forecasters see the boost from the tax cuts offsetting some of the potential drag on the economy caused by Trump’s tariff threat through at least 2026. U.S. gross domestic product, or GDP, will grow 2.1% year-over-year in 2025 and 2.2% in 2026 — up from 2.9% in 2023 and an expected rise of 2.8%. for this entire year.

But by extending provisions of the Tax Cuts and Jobs Act of 2017 and then adding new tax cuts in the form of a relaxed cap on the state and local tax deduction (SALT), the corporate tax cut for domestic manufacturers is projected by UM to be up to 15 % from 21%, plus some of Trump’s tax breaks on tips, overtime pay and Social Security, this will increase the US budget deficit.

(Economists doubt that a complete exemption from taxes on tips, overtime and Social Security benefits will be possible.)

By the end of 2026, the federal budget deficit could reach 6.8% of GDP, which would be unprecedented in the United States barring wars, a severe recession, or the recent COVID-19 pandemic. The deficit is currently around 6.1% of GDP.

“To briefly summarize our assumptions for the first two years of a second Trump administration,” the UM economists wrote, “we expect modestly larger budget deficits due to lower tax revenues that stimulate the economy, while higher tariffs will offset some of the stimulus .

“This relatively benign outlook means we do not expect significant changes to the long-term neutral interest rate. As a result, we continue to forecast moderate yields for long-term Treasury bonds.”

DOGE abbreviations are not counted

The forecast does not attempt to calculate the potential impact of one of Trump’s more unconventional policy ideas, the Department of Government Effectiveness (DOGE), which will be led by prominent businessmen Elon Musk and Vivek Ramaswamy.

Trump said DOGE would work to restructure government agencies and cut regulation and waste, potentially saving up to $2 trillion from the more than $6 trillion federal budget.

In terms of inflation, UM’s forecast assumes that the cost of living will continue its recent path of gradual slowdown after rising sharply in the first half of President Joe Biden’s term.

As for Michigan’s economy, economists expect stronger growth in 2025 and 2026 as potential federal tax cuts and additional interest rate cuts from the Federal Reserve will boost the economy. Michigan’s unemployment rate could drop from 4.6% at the end of this year to 4.3% by the end of 2026.

“While we recognize the very real risks of coming economic turmoil, we believe the most likely outcome will be a state economy that can withstand these challenges over the next two years,” the forecast said, “with moderate job growth accompanied by relatively low unemployment.” a tolerable level of unemployment,” the forecast says. inflation and real income growth.”

“The US economy has already experienced times of great uncertainty and remained intact,” the forecast said. “We predict that both Michigan and the nation will go down this path over the next two years.”

Here are some key indicators of the US and Michigan economic forecasts:

  • Annual US GDP growth will be 2.8% for this year, 2.1% in 2025 and 2.2% in 2026.
  • The US unemployment rate will be 4% for all of 2024, 4.4% in 2025 and 4.3% in 2026.
  • Michigan’s unemployment rate will be 4.6% by the end of 2024, 4.5% in 2025 and 4.3% by the end of 2026.
  • The inflation rate, as measured by the consumer price index, will be 2.9% this year, 2.3% in 2025 and 2.6% in 2026.
  • Passenger car sales will be 15.7 million this year, 16.1 million in 2025 and 16.2 million in 2026.
  • Regular mortgage rates will be 6.1% in 2025 and 5.8% in 2026.

Contact JC Reindl: 313-378-5460 or [email protected]. Follow him on X @jcreindl.