Despite the growing risk of economic recession at home, President Donald Trump has done nothing to prepare voters for the pain ahead. He is betting that the Federal Reserve will relax interest rates to mitigate the effect of tariffs, but monetary easing could also trigger an inflation spike.
Market meltdown over tariffs sparks fear of future Trump recession. (Photo: MSN)
In January, the United States was indulging in the illusion that President Donald Trump’s proposed tax cuts and deregulation would spur economic growth. However, since April 2, a date Trump proclaimed as “Liberation Day,” the domestic stock market shed trillions of dollars in value, fueling talk of a looming recession. In fact, Trump’s erratic tariff policies have only increased uncertainty, prolonged market turmoil, invited retaliatory measures, eroded business confidence and disrupted supply chains.
Although Trump announced a 90-day suspension of so-called reciprocal tariffs, the tariffs will continue to produce a negative impact on U.S. businesses and consumption. The 10 percent base tariff remains in place, and tariffs on steel, aluminum and other Chinese products have already taken effect. Today, the production of sophisticated goods often involves multiple shipments of parts and tools between the United States and other countries. Each time these items enter the United States, tariffs are applied, thus driving up the cost of domestic manufacturing.
If U.S. importers choose to bear the cost of tariffs, their profitability will decline and they will be forced to take drastic steps, such as downsizing and layoffs. Alternatively, if importers pass along partial — or all — tariff-induced costs to U.S. consumers, the consumers will reduce their consumption, leading to a decline in demand that will threaten both U.S. and foreign companies and potentially result in layoffs.
In addition, the extent and duration of Trump’s final tariffs remain unknown, and this uncertainty is accompanied by rising anxiety among domestic consumers. The Conference Board’s consumer confidence index fell in February because of rising inflation expectations, while consumer confidence, as measured by the University of Michigan, plunged from 64.7 in February to 57.9 in mid-March. Meanwhile, delinquency rates for auto loans and credit card debt now hover around levels seen during the 2008 financial crisis. All of this suggests that growth will slow, even if the nation manages to avoid a full-blown recession.
Tariffs have brought turmoil to the U.S. financial market, with the S&P 500 erasing all its gains for the year to date. The decline in asset markets poses a risk of worsening conditions in the real economy.
First, falling stock prices could reverse the wealth effect and curb consumer spending. A 20 percent drop in the U.S. stock market would lower consumer spending by 1.2 percentage points. Since consumption accounts for about 70 percent of domestic GDP, this would translate to a decline of 0.8 percentage points in economic growth. Generally, consumers tend to cut back on spending on non-essential and high-priced goods, and then on the necessities of life as things become more dire. Figures from Bank of America indicate that non-essential spending in the United States has already dropped, with spending on airlines, for example, falling by 7.1 percent and home improvement spending down by 2.7 percent.
Second, the response of companies to falling stock prices could exacerbate economic hardships. Typically, corporate managers track stock prices when making hiring and investment decisions. For example, after a one-third drop in the Nasdaq index in 2022, American tech companies laid off employees and cut spending.
A recent poll by Chief Executive, a business magazine, found that business confidence had plummeted to the lowest level since November 2012. In addition, consumers surveyed by the Federal Reserve Bank of New York in March put a 39.4 percent probability on the nation’s jobless rate being higher a year later, higher than January’s 34 percent probability and the highest level since April 2020.
Trump’s tariffs have left a global trail of wreckage. U.S. Treasury Secretary Scott Bessent outlined the typical progression for U.S. tariff policy, including announcement, countermeasures and escalation — a process typically spanning more than six months.
Many countries, eager to make a deal with Trump, hope that successful negotiations can avoid the most serious impact on their economies. For example, Vietnam — which is subject to a 46 percent tariff, proposed reducing its tariffs on U.S. products to zero. The proposal was rejected by Washington, highlighting the fact that simply reducing or removing tariffs on U.S goods is not enough. At the same time, Trump has continued to maintain a 10 percent base tariff to extract revenue from trading partners and ultimately balance domestic finances. This difficult demand may prompt countries to diversify their trade relations and engage widely with more reliable trading partners.
Currently, Trump is betting that the Federal Reserve will mitigate the impact of tariffs on the U.S. economy by relaxing interest rates, but the Fed typically responds more aggressively to high unemployment than it does to high inflation. In essence, monetary easing cannot offset the economic inefficiencies and distortions caused by the tariffs. Instead, doing so would risk exacerbating inflation.
The risk of economic recession is rising in the United States. Unfortunately, Trump has done nothing to prepare voters for the pain ahead.
