Trump Inherits Biden’s Costly Economic Legacy
America may be just about done with Joe Biden, but the malevolent economic legacy of his presidency is not done with us.
The latest economic data indicate that Donald Trump will inherit an economy where inflation has become entrenched at a high level, the manufacturing sector is moribund, trade imbalances persist, fiscal deficits remain at unsustainable levels, and consumers view the economy as seriously unhealthy.
This week’s consumer price index (CPI) report showed that inflation accelerated on a year-over-year basis, rising to 2.9 percent in December from 2.7 percent in November, and, on a month-to-month basis, climbing 0.4 percent after rising 0.3 percent in the prior month. While the bond and stock markets were relieved that core inflation came in softer than expected, inflation in the areas that squeeze household budgets hardest—food, energy, and housing—was still very hot. As the saying goes, there’s not much inflation if you exclude the necessities.
More troubling, indicators of underlying inflation suggest that the Federal Reserve’s two percent target will remain elusive. Median CPI ticked back up to 0.3 percent on a month-to-month basis, after briefly falling to 0.02 percent in November. It has been at that level since July, a clear indicator that inflationary pressures are not abating. This annualizes to around a 3.6 percent rate of inflation. The Cleveland Fed’s 16 percent trimmed mean CPI came in at 0.3, exactly where it has been in each month since September. That annualizes to around 3.2 percent inflation.
The much neglected producer price index report also contained red flags. While much of the financial media insists on calling this a “wholesale price index,” it actually has very little to do with wholesale prices. Instead, it is a measure of things sold by domestic producers to consumers, businesses, households, governments, and foreign buyers. Here the final demand indexes —which track prices paid for goods and services sold to end-users—were somewhat benign, but beneath the surface dangers abound.
The producer price index for processed goods for intermediate demand—goods sold to businesses that get turned into the stuff purchased by households and others—rose 0.3 percent after being flat in November. This index actually clocked in a small increase for the full year after deflating last year. This is a signal that the disinflationary pressure from the goods side of the economy, which has kept overall inflation numbers down even while services inflation was running hot, has likely run its course. Unprocessed goods for intermediate demand—that is, the raw materials of the economy—jumped 3.2 percent, the largest increase since a 4.6 percent rise back in 2022.
Manufacturing Still Slumping, Trade Deficits Soaring
The Institute for Supply Management’s manufacturing purchasing managers survey showed the factory sector in contraction for the ninth straight month, the 25th month of contraction out of the last 26 months. S&P Global’s survey of the sector was even more downbeat, prompting its chief economist to report that manufacturers had “scaled back their optimism for growth in the year ahead.” Orders are down, input costs are up (as the producer price indexes for intermediate demand showed), and production growth is abating.
The U.S. trade deficit is expected to come in around $1 trillion this year. The latest figures show a trade deficit of around $78.2 billion in November, a huge increase from the $64.8 billion recorded in the month a year earlier (and far above the $40 to $50 billion or so we were running in the prepandemic Trump first term). For all Biden’s talk of revitalizing U.S. manufacturer and bluster about putting American workers first, he has overseen a collapse of America’s trade balance to depths previously unknown.
The Congressional Budget Office reported last week that the federal government borrowed $710 billion in the first three months of fiscal year 2025, including $85 billion in the month of December. For the 2024 calendar year of 2024, the government borrowed $2.0 trillion. There’s no precedent for piling up debt this quickly during a peacetime economic expansion.
There are some signs of hope. Small business optimism is surging. The forward-looking indicators for the factory sector are brighter than they have been in years. “Many firms are generally anticipating that business will pick up in the New Year, with respondents pinning hopes on expectations that the new administration will loosen regulations, reduce tax burdens and boost demand for US-made goods via tariffs,” Chris Williamson of S&P Global reports. The share of Americans who say they think they will be financially better off a year from now has climbed to 35 percent, according to polling from YouGov for the Economist, up from the 29 percent that prevailed for most of last year.
But overcoming the burdens that Biden inflicted on the economy will not come easily. We’ll be haunted by the ghost of his economic legacy, and it will take every effort of the Trump administration and the razor thin GOP majorities to exorcise it.
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