If you’re trying to make sense of what is going on with the economy, you’re not alone. Even many of the professionals, whether they be academics or full time traders, are somewhat flummoxed.  

Surveys have shown that prior to the election, those who thought the economy was good or on the right track were almost exclusively voting Democratic, while those who found it bad or on the wrong track voted Republican.  

These views flipped along the same lines immediately after the election. The economic statistics haven’t changed much.  The belief that “our side” is right and “their side” is wrong is deeply embedded with economics – which not coincidently is a lot about expectations of what is about to happen. 

A generation of politicians have been raised on the Clinton era slogan of “It’s the economy, stupid.”  We’ve learned to sell and buy a myriad of political proposals through the lens of economics.  Too often we can’t separate what is from what we want it to be.

The caveat to selling policies that have a long run payoff was best articulated by John Maynard Keynes who quipped “In the long run, we are all dead.”  Politicians who have to run for re-election every two, four, or even six years are too familiar with this concept.  

Many of us know about the Reagan Revolution that brought about 80’s prosperity.  Few recall that Democrats gained 26 seats in the US House and one seat in the Senate during Reagan’s first midterm due to an unexpected recession, and lost control of the Senate in the 1986 midterms when freshmen Senators elected with Reagan’s 1980 victory couldn’t persuade voters their record deserved another term.

That’s the politics of where we are. The economics are setting up in similar fashion.

President Trump and Congressional Republicans view the November elections as a mandate for change. We’re actively changing tax policy, attempting to cut government spending and entire agencies, hitting trade policy with new tariffs and foreign policy via dramatically reduced foreign aid – with an open question of who are our actual allies.

That’s a lot of change for voters to absorb. When consumers can’t place bets on what is likely to happen in the future, they tend to close their wallets and spend much more conservatively.  Spending is just over two thirds of our economy as measured by GDP.  When consumers don’t spend, GDP declines.

Government spending is roughly 18% of GDP. While many believe that government spending when paid dollar for dollar with tax revenue crowds out consumer spending and/or investments, we’ve become used to spending with deficits.  The bill for this three-decade long sugar high is coming due, as interest on the debt is now greater than what we spend on national defense.  

Any cuts here won’t immediately go back to taxpayers, as we’ll be deficit spending for the foreseeable future. The short term result to reduced government spending will show up in statistics as reduced GDP.

The most immediate beneficiary of the Trump policies will show up as new net investment, as the threatened tariffs are meant to bring manufacturing jobs and energy production back to America.  Investment is roughly the same as Government spending, most recently measured at 17% of GDP.

To account for money spent here for goods produced abroad and goods produced here but sold elsewhere, we have a figure of net exports.  This is a negative number, as we import more goods and services than we export.  We had an amazing increase in goods imported last quarter, as companies raced to get foreign made goods on shore ahead of any tariffs imposed.  This has already shown up in preliminary GDP statistics, with the Atlanta Fed’s instant readings now showing a potential negative GDP for the quarter.

What does all this mean, in summary?  This will likely depend on where you get your news.  Outlets that saw no problems with the economy for four years are now suddenly obsessed with egg prices.  Outlets that covered inflation and falling real wages for four years are suddenly parsing the definition of inflation that properly excludes a tariff as a one-time price increase, yet pretending consumers won’t notice that or pay it.  But the GDP statistics are likely to be lower in the near term, just based on how we compute the measurement based on intentional measures to shore up the economy for the long haul.

Economics is always a bit of an experiment, and there are still outside forces that will come into play that can change all the planned outcomes.  We don’t even know if the President really wants tariffs, or if this is all a giant negotiating tool to get other countries to just reduce their tariffs on American made goods.  

It’s hard to form “rational expectations” in this environment of so much uncertainty. It’s best to try to keep a long term perspective when reading day to day headlines.  

We won’t know how ll of this turns out for years. Incumbents will still get a report card from the voters on how they think it’s going in November of 2026.