Trumponomics 2.0: Morgan Stanley’s Dystopian Yet Strangely Hopeful Economic Outlook

Morgan Stanley’s latest report feels like the economic equivalent of reading a Shakespearean tragedy—plenty of drama, a little hope, and just enough chaos to keep you guessing. Clocking in at 100 pages, the report gives us a crystal ball into the U.S. economy’s next 2-3 years under a potential second term of Donald Trump. Spoiler alert: the economy might be stumbling forward like a marathoner hitting the 20-mile mark—exhausted, but technically still moving.

From sticky inflation to restrictive immigration policies and tariffs that seem hell-bent on making everything more expensive, Morgan Stanley paints a picture that’s equal parts grim and fascinating. They’ve boiled their conclusions down into a recap, which I’ve boiled down even further into what I like to call “Dry Humor Meets Economic Armageddon.” Let’s dive in.

Immigration: Fewer Workers, Slower Growth

First up, immigration—or rather, the lack of it. In 2023, net immigration contributed to 85% of population growth, with 3.3 million newcomers boosting the U.S. workforce and consumer base. Translation? Without immigration, our population growth would look about as lively as a cactus in winter.

But Morgan Stanley predicts this influx will slow dramatically by 2025 as new policies clamp down on both legal and illegal immigration. Why does this matter? Because fewer people mean fewer workers, fewer consumers, and—drumroll—less GDP growth. It’s simple math. You can’t grow an economy without bodies to drive it, whether they’re sitting in cubicles, building houses, or buying too much avocado toast.

This slowdown isn’t just a problem for growth; it’s a productivity issue too. Businesses relying on immigrant labor may find themselves understaffed, and in case you hadn’t noticed, robots haven’t quite taken over yet (more on that later). Expect some sectors—agriculture, construction, and hospitality, to name a few—to take a significant hit.

Tariffs: The Economy’s Self-Inflicted Wound

Tariffs—the economic equivalent of tying your shoelaces together before a race. Morgan Stanley expects tariffs to return with a vengeance by late 2025, targeting everything from consumer goods to intermediate manufacturing components. The result? Higher prices across the board.

Tariffs are what economists call “stagflationary,” meaning they simultaneously slow growth and boost inflation. They’re essentially a tax on imports, and while they’re great for making domestic products look more competitive, they also make everything more expensive for consumers. In other words, it’s a lose-lose situation unless you’re in the niche business of selling tariff-laden goods.

Morgan Stanley predicts that the combination of lower immigration and higher tariffs will make inflation even stickier than it already is. If you were hoping for a rapid return to 2% inflation, think again. Instead, we’re looking at prolonged price pressures that will likely keep the Federal Reserve’s hands tied for years.

Sticky Inflation and the Fed’s Impossible Task

Let’s talk about inflation—the uninvited guest that just won’t leave. Morgan Stanley predicts that tariffs and a shrinking labor force will keep inflation elevated well into 2025 and beyond. And while the Fed might want to slash rates to support growth, their hands are tied by these inflationary pressures.

Here’s the timeline according to Morgan Stanley:

• Mid-2025: The Fed pauses rate hikes, with terminal rates hovering around 5%.

• Late 2026: The Fed finally begins cutting rates as growth slows and inflation (hopefully) eases.

  
  

But don’t get too excited about those rate cuts—they’re a long way off. In the meantime, expect higher borrowing costs to keep squeezing consumers and businesses alike. If you’re planning to buy a house, a car, or anything else that involves financing, you might want to wait.

GDP Growth: From a Sprint to a Stroll

Remember the days of 2.4% GDP growth? Enjoy those memories, because Morgan Stanley predicts we’re heading for a much slower pace:

• 2024: 2.4% growth (not terrible, but nothing to write home about).

• 2025: 1.9% growth (yawn).

• 2026: 1.3% growth (are we even trying anymore?).

  
  

The reasons are clear: fewer immigrants mean less workforce growth, tariffs mean higher costs, and high interest rates mean less investment. It’s a trifecta of economic meh.

Jobs: The Illusion of Stability

Here’s where it gets weird. Despite slower growth and inflationary pressures, the unemployment rate isn’t expected to rise much. Why? Because the labor force itself is shrinking. If fewer people are looking for jobs, unemployment as a percentage looks stable—even if the overall economy is struggling.

Payroll growth, however, is expected to slow significantly, dropping to an average of 113,000 jobs per month in 2025. That’s a far cry from the robust numbers we’ve seen in recent years. And while AI investments might keep certain sectors afloat, don’t expect a hiring boom anytime soon.

AI: The Economy’s Caffeine Shot

Speaking of AI, let’s talk about the one bright spot in Morgan Stanley’s otherwise gloomy forecast. Business investment in artificial intelligence is expected to remain strong, providing a much-needed boost to productivity and innovation.

But here’s the thing: while AI might make businesses more efficient, it’s not a silver bullet. For one, it doesn’t solve the consumer spending problem. And two, it might actually lead to more layoffs as companies replace human workers with algorithms. So, while AI could keep the economy from stalling completely, it’s not going to drive a full recovery.

Consumer Spending: The Party’s Over

High interest rates and slower job growth are expected to put a major damper on consumer spending by late 2025. With fewer immigrants entering the country and contributing to demand, businesses that rely on consumer spending could face serious challenges.

And let’s not forget that tariffs will make many goods more expensive, further squeezing household budgets. It’s a vicious cycle: higher prices lead to lower spending, which leads to slower growth, which—well, you get the idea.

Recession Risks: The Wild Card

Morgan Stanley isn’t calling for an outright recession—yet. But they do warn that a shock to the system could tip us over the edge. Their hypothetical example? A Bitcoin crash. Imagine BTC hitting $105,000, only to collapse back to $70,000. The ripple effects could trigger a broader market selloff, leading to layoffs, reduced spending, and—you guessed it—a recession.

Of course, this is just one scenario. The point is that the economy is precariously balanced, and it wouldn’t take much to knock it off course.

Final Thoughts: What Should You Do?

So, what’s the takeaway from all this? For starters, prepare for slower growth, higher inflation, and tighter financial conditions. Morgan Stanley’s forecast might not be a guaranteed outcome, but it’s a sobering reminder that the road ahead won’t be easy.

Here’s what you can do to navigate these choppy waters:

• Diversify: Don’t put all your eggs in one basket, especially with tariffs looming.

• Hedge Against Inflation: Consider investments that perform well in inflationary environments, like real estate or commodities.

• Keep Cash on Hand: Liquidity is king in uncertain times.

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And if you’re looking for a playbook on surviving Trumponomics 2.0, stay tuned. Apparently, there’s a guide for that now. Until then, maybe start taking AI classes—you know, just in case the robots take over.