The stock market is in a tailspin, Wall Street executives are alarmed, and many analysts are more concerned that the United States may enter a recession as a result of President Donald Trump’s abrupt tariff rises last week.
The tariffs, which are scheduled to go into force on Wednesday, include increased import duties on 60 countries and a blanket 10% penalty on almost all countries. According to experts, even if the increases are partially reversed through talks in the upcoming weeks or months, they are expected to cause economic disruption because they are so significant and are implementing so quickly.
The likelihood that the United States will go through a recession, in which the economy contracts and unemployment increases, has increased from 35% to 45%, according to Goldman Sachs economists. Even that prediction is predicated on the assumption that many of the duties are lowered or bargained away. In an analyst note, Jan Hatzius, chief economist at Goldman, and his colleagues stated that if not, “we expect to change our forecast to a recession.”
Similar concerns are being raised by other analysts; JPMorgan estimates that there is a 60% chance of a recession and that inflation will increase from the present rate of 2.8% to 4.4% by the end of this year.
Should the tariffs remain in place for an extended period, they will likely raise costs and uncertainty for businesses, which could reduce their willingness to hire, invest in new equipment or software, or expand into new markets. Americans could cut back on their spending in the face of higher prices. The economy could start to shrink, after expanding 2.8% in 2024.
The majority of economic indicators, including job growth, are still stable as of right now. According to a federal study last week, employers added more jobs than anticipated in March, and layoffs are still at an all-time low.
However, surveys indicate both businesses and consumers are growing more concerned about the state of the economy. Whether those worries result in a downturn is what everyone, including Wall Street investors, economists, and Federal Reserve officials, will be keenly monitoring.
Here are some questions and answers about recessions:
Are there any signs a recession is imminent?
Not quite yet. However, a real-time economy tracker run by the Federal Reserve’s Atlanta branch is one innovation that has caused a great deal of anxiety. It currently suggests that the GDP may contract by 0.8% annually in the first three months of this year, compared to 2.4% in the fourth quarter of last year.
Technically speaking, the Atlanta Fed’s tracker is an ongoing tally that is updated in response to new economic data rather than a forecast.
A recession usually happens when the economy is hit by a short-term shock, like the 2020 pandemic or the 2007 housing bubble burst. Whether tariffs will have a significant enough effect to reverse the economy is still up in the air.
However, Wells Fargo economists estimated in a report on Friday that when all tariffs are implemented, the average U.S. tariff will increase tenfold to almost 23%, the highest level since 1908.
Wells Fargo analyst Shannon Grein said that such a change “practically overnight will throw sand in the gears of global supply chains in ways that we have not seen since the pandemic and perhaps since World War II.”
What are Trump and his officials saying?
“Sometimes you have to take medicine to fix something,” Trump told reporters on Sunday. On the same day, however, Treasury Secretary Scott Bessent stated that the government is focused on “building the long-term economic fundamentals for prosperity” and that “there does not have to be a recession.”
What signs point to the start of a recession?
A consistent increase in job losses and a spike in unemployment would be the most obvious indicators. The government is keeping a tight eye out for indications of an increase in layoffs in its weekly report on the number of persons applying for unemployment benefits, which is released every Thursday. By historical standards, the number of aid applications has remained quite modest thus far.
According to Torsten Slok, chief economist at asset management company Apollo, who is monitoring a variety of real-time data, there are indications that the economy is deteriorating. While Las Vegas tourism has somewhat decreased, bankruptcy filings have increased. He claimed that this year’s weekly movie theater attendance is lower than it has been in previous years.
Apart from tariffs, what other factors can cause the economy to slow down?
In addition to announcing plans to reduce government expenditure, the Trump administration is moving forward with massive layoffs at federal agencies, including the Department of Health and Human Services. At least temporarily, both might have an impact on the economy.
Additionally, the uncertainty surrounding the Trump administration’s trade policies is likely to deter firms and consumers from spending, even if some of the tariffs that were announced on April 2 are removed or lowered. For instance, if businesses are unsure of how long the tariffs will be in place, it is difficult to predict if they would increase the number of factories in the United States, which is what the tariffs are meant to promote.
Boycotts of American travel and products abroad may also be an influence. According to Slok, data on airline reservations indicates that there will be a 70% decrease in Canadian-to-US travel over the next six months. According to Goldman Sachs, such adjustments could reduce growth by 0.2 percentage points this year, while the impact on the economy as a whole is probably going to be minimal.
How might the Federal Reserve respond?
At their June meeting, many economists now anticipate that the Fed will lower its benchmark interest rate and make at least three reductions this year.
However, the Fed is in a challenging position since, even before the tariffs go into force, inflation appears to be stuck over its objective of 2%. Normally, the Fed would like to maintain borrowing prices high in order to limit spending and control inflation.
However, the Fed would typically lower its benchmark rate to encourage borrowing and spending if tariffs hurt the economy and result in job losses. However, tariffs are unlikely to exacerbate inflation until there are unmistakable indications of a significant slowdown in the economy.
Gennadiy Goldberg, head of TD Securities’ U.S. rates strategy, stated that they “can not really be proactive here because they do have inflation to worry about.” “What we are looking at is a Fed that will find itself in a difficult situation.”
Chair Jerome Powell stated on Friday that the Fed’s primary responsibility was to control prices and that the tariffs might make inflation worse. According to his remarks, the Fed would probably abstain from its upcoming meeting in May.
Who makes the determination that a recession has begun?
The obscure-sounding National Bureau of Economic Research, a group of economists, is responsible for formally declaring recessions. According to its Business Cycle Dating Committee, a recession is “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
The committee takes hiring patterns into account. In addition, it evaluates a wide range of other data points, such as measures of manufacturing output, retail sales, inflation-adjusted spending, employment, and income. It gives significant weight to a measure of inflation-adjusted income that does not include Social Security or other government assistance payments.
