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President Trump has made major policy changes in the first few weeks of his second term. Amid the political upset, some people worry that the U.S. economy could go into recession as a result of tariffs, deportations and mass layoffs of federal employees. The recession scenario seems unlikely at this point, but we have great uncertainty about what exactly will happen.

The wisdom of these policy changes should be debated in several dimensions, including what is just, constitutional and beneficial to the public. This article will focus on one narrow aspect: the effects of changes on the short-term economic forecast, particularly whether they are likely to trigger a recession. Keep in mind that even without a recession one could find these policies unwise; and even with a recession, someone else might find these policies worthwhile in the long run.

Immigration Policy
 

Immigration effects could come in two ways: fewer people coming into the country, and deportations of those already here. As note in my post-inauguration article, I lowered my GDP forecast down a few tenths of a percent for expected lower immigration. That’s less growth, not a decline in GDP.

Deportations could cause an actual drop in GDP, thus triggering a recession, but of an odd sort. Fewer workers would lower employment, production, total income and business sales, the key statistics we usually uses to evaluate whether we are having a recession. But a deportation-driven recession would not have higher unemployment—it would have lower unemployment. And the income per capita of the remaining residents would not be much less. (There would probably be a small worsening of conditions for some people whose work was complementary to low-skilled immigrant workers, offset to some extent by people who would be hired for low-skilled labor.)

However, deportations would require more resources for immigration control than we currently use, so seems unlikely now.

Tariff Policy
 

Tariffs are likely to raise costs for U.S. manufacturers and other businesses that use imported products and commodities. They will also raise prices for consumers, which could hurt U.S. producers of discretionary goods and services. However, the magnitude of tariff damage would likely be small relative to the size of the entire economy.

Uncertainty effects of tariffs are unlikely to occur in the near term. The argument goes that businesses would use less efficient production methods if they fear tariff changes would make international suppliers uneconomical. Even if foreign sourcing is cheaper, simply the risk of tariffs will limit companies’ appetites for imported goods. That may be the case, but supply chains are altered only gradually. In the next two years any such effects will likely be negligible.

Federal Employee Layoffs
 

As for government employment layoffs, really large cuts will probably not happen. Most court cases and legal scholars hold that the president’s constitutional duty to see that the laws are faithfully executed require that Congressionally appropriated money must be spent. I’m not a legal scholar; maybe there is a case for overturning this view. Until that happens, though, this forecast presumes that Trump has to spend the money.

Firing people does not solve that problem, unless Congress acts to void previous appropriations. The Republicans have a majority of both houses (and budget rescission does not require 60 votes in the Senate). However, all representatives have government offices in their districts, as Senators have government offices in their states. Members of Congress in recent years have not acted as fiscal conservatives, but rather as promoters of spending. It’s possible that Congress would allow the president to cut spending, but unlikely based on recent history.

It is possible that Trump can use employee dismissals as an excuse for not spending the money. His lawyers might say to a judge, “Oopsie, we didn’t realize we need employees to spend the appropriations. Give us some time to comply with the law.” But that would only work for a short period. (And “oopsie” seems not to be in President Trump’s vocabulary.)

Even if many federal employees were fired, we are in a supply-constrained economy rather than a demand-constrained economy. We have about eight million open job positions across the country, and the survey understates openings. Recent economic growth increased due to higher immigration, confirming that labor supply constrains the economy. Freeing up some workers from government service would enable more expansion private business, as well as state and local governments. Some of the older federal employees might have trouble finding another job, but most would be absorbed into the rest of the economy. That’s most true for the approximately 200,000 probationary workers, who have been on the job less than one year in most cases.

Risks To The No-Recession Forecast
 

What could go wrong with this economic forecast? One risk is that the Trump administration substantially cuts the federal workforce along with federal spending. We could see a flood of former government employees unemployed. For perspective, the latest employment report show three million federal employees relative to 159 million total employment. Recall what happened at the end of World War II. Soldiers and sailors came home amid forecasts of high unemployment. But strong consumer spending and a labor-constrained economy let to rising employment. Our situation today is roughly comparable, so that risk appears to be minor.

General uncertainty has appeared among business leaders considering capital spending projects, but so far we only have anecdotes. We have hard data on business orders of capital equipment only through December. The last two months were very strong, but that may change with the flood of changes announced since Inauguration Day. My own advice to business leaders suggest reason for concern. I’ve said that the overall economy looks fine, but they need to pay close attention to those specific issues affecting their particular industry, including tariffs, labor and regulations. But if enough people follow that advice, we could see delays in commitments to capital spending and hiring that pull down the economy. That’s not part of my economic forecast at this stage, but it is something to worry about.

Wrapping the new issues together with underlying economic forecast from before the inauguration, a recession does not seem likely in the next two years.

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