There are often adjustment costs associated with changing policies. Laying off government workers puts upward pressure on unemployment, and imposing tariffs increases prices and lowers demand for foreign goods. How significant the impact of these policies will be on the economy depends on the magnitude and duration of each policy.
The two first charts below show the impact of tariffs and DOGE on GDP and inflation, using a model similar to the Fed’s model of the US economy, FRBUS. The results show that over the coming quarters, inflation will be 0.2% higher and GDP will be 0.5% lower.
In other words, DOGE and tariffs combined are a mild temporary shock to the economy that will put modest upward pressure on inflation and modest downward pressure on GDP.
This is also what the incoming data is showing. This week, we saw inflation expectations move higher, a reversal of capex spending plans, and weakness in consumer confidence, see the third and fourth chart, and our chart book here. Jobless claims also moved higher, likely driven by government contractors and also by federal workers who had not received forms SF-50 and SF-8 and decided to file for unemployment benefits anyway to get the process started.
The bottom line for markets is that this is a modest stagflation shock to the economy but not a recession.
Note: Assuming $100bn in DOGE savings resulting in 0.4% reduction in fiscal deficit, 5% appreciation of exchange rate, and 0.5% pt increase in inflation expectations shocks applied in Q1 2025. Source: Bloomberg SHOK model, Apollo Chief EconomistNote: Assuming $100bn in DOGE savings resulting in 0.4% reduction in fiscal deficit, 5% appreciation of exchange rate, and 0.5% pt increase in inflation expectations shocks applied in Q1 2025. Source: Bloomberg SHOK model, Apollo Chief EconomistSource: Business Roundtable; NFIB; Federal Reserve Bank of Philadelphia, Dallas, New York, Kansas, and Richmond; Apollo Chief EconomistSource: BEA, FRBNY, Federal Reserve Bank of Richmond, Federal Reserve Bank of Philadelphia, Kansas City Fed, Federal Reserve Bank of Dallas, Haver Analytics, Apollo Chief EconomistSource: Conference Board, Haver Analytics, Apollo Chief Economist
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