US Economic Outlook: Fiscal Deficits, Slowing Growth, and Clean Energy Policy’s Impact

The recent enactment of a significant legislative package, championed by President Donald Trump, is projected to augment federal deficits by an estimated $3 trillion to $4 trillion over the next decade. This substantial fiscal development immediately influenced financial markets, evidenced by a 10-basis-point increase in the 10-year Treasury yield following its passage.

• A new legislative package is projected to add $3 trillion to $4 trillion to federal deficits over the next decade.
• The June jobs report surpassed expectations, showing 147,000 new jobs and a decrease in the unemployment rate to 4.1%.
• Market expectations for Federal Reserve rate cuts shifted from three to two by year-end, with the probability of a July cut significantly reduced.
• The new budget law phases out long-standing renewable energy tax subsidies, maintaining full credits for projects until 2026 and manufacturing until 2028.
• The legislation includes a critical dependency clause, linking tax credits to a reduced reliance on Chinese supply chains.
• Analysts project that average household energy costs could rise by $160 by 2030 and $280 by 2035 due to these policy changes.

Despite this significant fiscal backdrop, recent economic data presents a more nuanced picture. The June jobs report exceeded expectations, indicating the addition of 147,000 new jobs and a slight decrease in the unemployment rate from 4.2% to 4.1%. This stronger-than-anticipated performance prompted a recalibration of market expectations for Federal Reserve interest rate cuts; futures traders now anticipate two cuts by year-end, down from three previously, and the probability of a July cut has significantly diminished.

However, a deeper analysis of the job figures reveals more continuity than outright strength. Labor force participation continued its slight decline, while job growth primarily stemmed from the government and healthcare sectors. Cyclical industries, including construction, manufacturing, and hospitality, exhibited a notable recent slowdown when viewed through rolling averages, consistent with levels observed over the past few years. Similarly, non-cyclical sectors, while stable, displayed a gentle recent downtrend, particularly marked by a shrinking federal government workforce.

This overall economic picture aligns with other key indicators, such as low levels of hiring, firing, and quitting, alongside increasing difficulty for the recently unemployed to secure new positions. While corporate profits continue to grow, their pace has decelerated compared to previous years. Projections for second-quarter GDP growth, from sources like the Atlanta Fed’s GDPNow and economist consensus, hover around 2%, slightly above the economy’s long-term potential. In essence, the U.S. economy currently presents as solid but largely static, characterized by a subtle decelerating trend. The upcoming second-quarter earnings season, commencing with major banks, will provide the next crucial insights.

Shifting Dynamics in Clean Energy Policy

Concurrently, a significant shift in U.S. energy policy has emerged with the new budget law, which phases out long-standing tax subsidies for renewable energy manufacturing and project development. While the House initially proposed an abrupt termination, the enacted Senate version adopts a gradual approach, maintaining full tax credits for projects commencing construction by 2026 and manufacturing incentives until 2028.

This legislative trajectory has driven considerable volatility in renewable energy stocks. Initial declines observed after the House bill and concerns over additional taxes were later offset by gains following the Senate bill’s passage and subsequent House approval. Many renewable stocks have since recovered, surpassing their valuation at the onset of the Trump administration. Notably, companies focused on residential projects, such as SolarEdge, experienced a significant uplift due to provisions in the Senate bill that eased qualification for residential tax credits, a development contrary to prior expectations of their removal.

Challenges and Economic Implications

However, significant challenges persist. A primary concern is the feasibility of new renewable projects meeting the 2027 deadline for grid connection, given extensive interconnection queues and permitting hurdles, as noted by Glenn Schwartz of Rapidian Energy. This suggests that the extended timeline primarily benefits existing projects rather than facilitating new ones.

Additionally, the law introduces a critical dependency clause, withholding tax credits from manufacturers and installers with excessive reliance on Chinese supply chains. Despite efforts to bolster domestic manufacturing, the U.S. industry’s substantial exposure to China and the government’s untested capacity for monitoring compliance present significant implementation complexities, according to Ben King of Rhodium Group.

This policy uncertainty emerges amidst record U.S. electricity demand, partly driven by the proliferation of AI data centers. With the nation’s natural gas-dominant power grid operating near maximum capacity, as highlighted by Jesse Jenkins at the Ardlinger Center for Energy and Environment at Princeton University, any system flexibility relies on expanding wind, solar, and battery infrastructure, or increasing reliance on less efficient, higher-emission power plants. Jenkins projects that this legislative shift could lead to reduced and more expensive renewable energy deployment, forcing greater reliance on existing, less efficient generators, resulting in higher energy costs and increased emissions. He estimates average household energy costs could rise by $160 by 2030 and $280 by 2035 due to these changes.

Despite these concerns, the long-term impact on renewable investment remains subject to debate. While many analysts foresee a slowdown, some remain optimistic, asserting that a significant portion of industrial-scale projects can remain viable even without subsidies. Joseph Osha of Guggenheim Partners suggests that while profitability may decrease, the fundamental demand for energy, particularly from renewables where projects remain profitable, will continue to drive development. Given the imperative for an evolving energy grid, the new budget bill presents a significant, though potentially surmountable, barrier to the acceleration of renewable energy supply in the United States.