Is a recession likely under Trump’s policies?
Concerns regarding a potential recession are unsettling financial markets, evidenced by a significant decline in tech stocks and the Dow Jones Industrial Average on Monday. Equity valuations have been elevated for an extended period, suggesting that the current fluctuations may represent a standard market correction. However, indicators of an economic deceleration are emerging, warranting attention from the Trump Administration. Mr. Trump contributed to the prevailing uncertainty with his ambiguous reply to a query posed by Fox News host Maria Bartiromo during a Sunday interview regarding his expectations of a recession occurring this year. “I am reluctant to make forecasts of that nature,” he responded. “We are currently experiencing a transitional phase, as the magnitude of our undertaking is substantial.”
When questioned later on Sunday regarding his hesitance to dismiss the possibility of a recession, he once more displayed uncertainty, stating, “I tell you what, of course you hesitate.” Who can say? His atypical indecision unsettled markets, suggesting that he may be indifferent to a “minor disturbance,” as he articulated in his recent address to Congress. Following a period of significant volatility, equity markets have not only relinquished the gains accrued since Mr. Trump’s election but have also experienced further declines. Mr. Trump correctly observed that a President ought not to be overly concerned with immediate investor responses to economic policies that are designed to enhance long-term growth. However, there are evident indicators suggesting a deceleration in the U.S. economy.
Consider the jobs report released on Friday, indicating that employers expanded their workforce by 151,000 positions in the previous month. The figure represents a reduction to fifty percent of the totals recorded in November and December. The recent decline in leisure and hospitality employment over the past two months suggests a potential contraction in consumer discretionary spending patterns. The labor force participation rate experienced a decrease of 0.2 percentage points, settling at 62.4%, primarily due to a reduction in participation among men. In the latest monthly report, the manufacturing sector experienced an increase of 10,000 jobs. The count of part-time workers desiring full-time employment rose by 460,000, reaching a total of 4.9 million, marking the highest level since the spring of 2021.
The Institute for Supply Management’s purchasing managers’ index (PMI) indicated an expansion in manufacturing activity last month; however, this growth was primarily driven by a significant increase in prices, reaching the highest levels observed since the summer of 2022, coinciding with the peak of inflation. Feedback from survey participants indicated that ambiguity surrounding Mr. Trump’s erratic tariff policies is negatively impacting business confidence. A manufacturer of transportation equipment indicated that “customers are delaying new orders due to uncertainty surrounding tariffs.” A machinery manufacturer stated that the forthcoming tariffs are leading to an increase in the prices of their products, citing that significant price hikes are anticipated from suppliers. When tariffs lead to an increase in steel prices, companies that utilize steel subsequently adjust their prices upward.
Even service-oriented enterprises are experiencing significant volatility. “Tariff actions have generated significant disruption in information dissemination and pricing strategies,” stated a representative from an accommodation and food services enterprise. Uncertainty surrounding tariffs is aligning with an increase in consumer apprehension. Following a rise in the previous autumn, the Conference Board’s consumer confidence index experienced a decline in February, coinciding with an increase in inflation expectations. A significant number of respondents referenced tariffs.
Consumers are exhibiting signs of stress following four years of inflation, with delinquencies on auto loans and credit cards nearing levels reminiscent of the aftermath of the 2008-09 recession. A stock market correction may adversely impact Main Street by negating the wealth effect that has supported consumer spending. The highest earning decile represents approximately fifty percent of total consumer expenditure. Reduced government expenditure, although essential for reallocating resources towards private investment, could negatively impact GDP in the short run.
This indicates a potential deceleration in growth prospects, notwithstanding the possibility of avoiding a recession. The deregulation initiatives and the continuation of the 2017 tax reform are likely to support business investment in the long run. However, the elevated expenses and unpredictability stemming from his tariffs are currently detrimental to the economy. Should Mr. Trump aim to alleviate concerns regarding a potential recession, it would be prudent for him to reconsider the implementation of his tariff proposals.
