Institute Alert

• The president’s negotiating tactics so far, of threats and concessions by turns, has been disorienting to market sentiment.
• Broadly speaking, the policies on trade and federal spending show us costs and benefits, but nothing that we think will derail a moderating but sustainable pace of economic growth.

• Our investment guidance continues to focus on a recovery for cyclical equity performance and commodities as well as a more selective approach to fixed income.

We see an evolving negotiating strategy that keeps the dealing going by using pressure and concessions by turns. We can see this pattern in the negotiations to stop the fighting in Ukraine, in the federal agency budget and staff cuts, and in the on-again off-again tariffs against Mexico and Canada. These examples underscore our preference to look through the ups and downs of the deal making to focus on the president’s negotiating goals and their likely economic and market consequences. This report highlights some of the questions we have heard most often from investors.

Some tariffs seem designed to bring industry back to the U.S., but others seem like leverage tactics to negotiate other policy objectives. Tariffs on China and on steel and aluminum (which apply as of March 12) intend to reshore U.S. manufacturing. We expect that these levies should persist long enough to encourage new U.S. manufacturing, and this persistence should raise prices across an array of goods while applying some downward pressure on economic growth. By contrast, the Mexico and Canada tariffs seem more for leverage, intended to negotiate North American cooperation to limit immigration and drug trafficking. These tariffs seem less likely to stick and, in fact, are even having trouble getting started.¹

No, spending shifts to avoid tariffs pulled some spending into 2024 from 2025, but we expect steady 2025 economic growth, albeit with some moderation from 2024. Consumers and businesses anticipated tariffs after the November elections, and the record-high increase in the December goods trade deficit shows that they pulled forward some 2025 expenditures into 2024.

The spending shift combined with a very cold January and the California wildfires to pull some economic forecasts into contraction or recession, but we think that conclusion is misleading. Rolling three-month growth of consumers’ real (inflation-adjusted) incomes has accelerated steadily since last October, giving consumers the means to ramp up spending. Bank credit availability has improved, contributing to adequate, if not ample funds available throughout the financial system; stock market windfall gains remain sizable; and the economy’s credit-sensitive sectors (including housing) are getting relief from recent declines in longer-term interest rates. We continue to expect a more moderate but positive economic growth pace than in 2024, and our year-end 2025 inflation forecast of 3.3% allows for some tariff-related price increases.

We expect tariffs to have some economic cost. Since January, we are seeing some U.S. firms raise prices on the goods affected by the threatened Mexico and Canada tariffs. But the price gains are not the 25% of the tariff. In general, we expect that the more sensitive a company’s customers are to a potential price increase, the more that management will look for ways to reorient its supply chain to avoid tariffs.² Federal revenue from recent tariffs by Presidents Trump (imposed between 2018 and 2019) and Biden (2020 – 2021) rose and then quickly fell (Chart 1), suggesting that revenue declines as adjustments away from suppliers and goods that face tariffs increase.

Chart 1. Peaks and declines in tariff revenue suggest buyers adjust away from tariffsSources: Bloomberg and Wells Fargo Investment Institute, monthly data, January 2000 – January 2025.

The chart also suggests another important feature for investors. To the extent that tariffs raise revenue, they are a goal in themselves, but revenue could fade. We do not believe the administration expects to raise enough revenue to close the entire federal deficit, but tariff revenue possibly could balance out a new tax cut in the government’s budget proposal. Nevertheless, fixed-income and equity markets likely will react skeptically to tariff-revenue projections, precisely because tariff revenue, again, may fall off quickly. This is one hint that ambitious budget goals by congressional leaders may again face a difficult fight and potentially generate more financial-market volatility.

As with tariffs, consolidating government agencies seems to involve a negotiation, in this case with Congress and the courts, over allowing the administration to cut spending unilaterally. We note here that there are already many court cases and some injunctions against executive branch efforts to cut federal programs, and in some cases the Trump administration has counter-sued to reverse rulings against it.³ Notably, the Supreme Court ruled last week against the president’s attempt to cut some U.S. foreign aid. This case involves the principle that Congress originally appropriated the funds, so part of the budget-cutting goal involves a challenge to Congress.

Many of these cases may continue, or the president may change his approach to satisfy Congress or a court decision. Presidents from Andrew Jackson to Joe Biden have tested the limits of the president’s power.⁴ Of course, the Trump administration has issued a flurry of challenges — 87 executive orders as of March 11 and on pace to eclipse the 220 in his first term.⁵ This causes churn in news headlines and financial markets, but we think extreme scenarios are unlikely. Ultimately, we want to look through the headlines to the goals, and then the question for markets should be the balance of costs and benefits.

First and foremost is the cost to the individuals who lose their jobs. Extending to the broad economy, the job losses are measurable but small — the March 7 Bureau of Labor Statistics employment report for February showed 10,000 federal jobs lost in the month. While the cuts continue, that number will grow. Most sources we have checked put the latest number of early retirements at 75,000, and another 62,500 laid off in the first two months of 2025.⁶ Even if the layoffs touch the high end of that range, the roughly 300,000 retirements and layoffs is only 0.2% of the 159.2 million nonfarm workers (according to the Bureau of Labor Statistics’ February 2025 report).

Anxiety about federal layoffs seems unlikely to cause a recession. Following the post-pandemic hiring surge of 2021 – 2022, the labor market has been adjusting towards its 15-year average monthly job gain (161,000 per month from January 2010 – February 2025; Chart 2 on the following page). Job-growth normalization probably means a more moderate pace of economic growth than in 2024, but we do not expect a recession.

Chart 2. Monthly job gains signal a reversion to an average, not a recessionSources: Bloomberg and Wells Fargo Investment Institute, monthly data, January 2021 – February 2025. *The average monthly change is computed for the period January 2010 – February 2025.

Moreover, historical evidence also suggests that those federal workers who lose their jobs are very likely to be reemployed. Two prior episodes of similarly sized (300,000) federal job cuts occurred between 1994 – 1997 (under President Clinton) and 2011 – 2014 (President Obama). In both cases, and, more importantly, across economies of different strength, roughly 50% of those laid off found private-sector jobs. The remainder went in equal proportions for early retirement or found jobs with either state and local governments or different federal agencies.⁷

Likewise, we believe the benefits of shrinking the federal bureaucracy are likely overstated, or at least not immediate. Unionized federal workers have had success in courts blocking their layoffs. For agencies funded by discretionary spending (which amounts to roughly 30% of federal spending but accounts for many of the federal employees), Congress — not the president — sets the level of funding, meaning that to save money going forward, Congress would have to codify the workforce reductions.

We believe service delays seem most likely, but not benefit cuts. Medicaid cuts are at the heart of a proposed $880 billion in mandated spending cuts by the House Energy and Commerce Committee over the next ten years. The Affordable Care Act’s Medicaid expansion program enacted in 2018 seems most vulnerable and would transfer at least part of the health insurance burden onto Medicare and similar state-level insurance programs. Among the more visible industries at risk are not-for-profit hospitals. Municipal credit ratings also could suffer from the added financing of programs partially or fully funded by states.⁸

As for Social Security, proposed cuts of up to 12% of the Social Security Administration’s workforce risk processing and other administrative delays. The Agency describes the cuts primarily through consolidating its regional office structure, and streamlining redundant layers of management, but without cuts to benefits.⁹ The cost is likely to be in longer delays for case hearings. Social Security staffing levels are at a 25-year low amid a steady rise in the country’s retirement population. Wait times for claims processing still are well above the targeted 270 days for the backlog of over 300,000 cases.¹⁰

First-time presidents typically propose many initiatives during their first few months, but they usually lack the experience with the constraints of the office to push so many plans so quickly. President Trump had his rookie year in 2017 and appears to be exploiting his and his team’s experience to make many more changes than usual. In our view, so many negotiations that test the limits of presidential spending authority and international trade patterns have contributed materially to recent financial-market volatility.

Our investment guidance will focus on the president’s goals and any economic costs and benefits that may impact markets. We particularly favor not extrapolating from headlines to extreme outcomes, such as the loss of Social Security benefits or an economic recession. We believe the economy has downshifted to a more historically average but sustainable pace. Tariffs and federal job cuts will have costs, we believe, but not enough to derail the investment returns we continue to expect. Our guidance focuses on a recovery for cyclical equity performance and commodities as well as a more selective approach to fixed income.

¹ For more detail on the costs and economic adjustments that we believe tariffs will create, please see our report, “Investment impact of a new round of tariffs,” March 4, 2025.

² Ibid.

³ Allison Durkee, “Judge Halts Trump’s DEI Contract Ban—See Full List Of Trump Administration Lawsuits,” Forbes, February 21, 2025.

⁴ The Supreme Court struck down President Biden’s initial attempt to forgive student loans, for example. For more on the different historical contexts but similar approaches between Presidents Jackson and Trump, please see H.W. Brands, “Andrew Jackson: His Life and Times,” Anchor: 2006.

⁵ According to the Federal Register, as of March 10, 2025.

⁶ See, for example, “Federal Government Layoffs Tracker 2025 - Latest DOGE cuts so far,” Newsweek, Kate Nalepinski, March 11, 2025.

⁷ Ibid.

⁸ Berkeley Lovelace, Jr., “Who does Medicaid cover? How Congress proposed budget cuts could be felt,” NBC news, Berkeley Lovelace, Jr., March 2, 2025. See also “Potential Medicaid cuts could threaten not-for-profit hospital margins,” Fitch Ratings, March 4, 2025.

⁹ “Social Security Announces Workforce and Organization Plans,” Social Security Administration, February 28, 2025.

¹⁰ “Social Security Administration Annual Performance Report for Fiscal Year 2024,” Social Security Administration, January 2025.

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