Op-Ed
Is Donald Trump Starting a Recession?
April 21, 2025
There are, by now, too many reasons why we can expect a U.S. recession later this year.
Seldom before has a U.S. administration made as many fundamental economic policy errors in its first one hundred days in office as has the current Trump administration. It is difficult to see how those errors will not result in a U.S. economic recession before yearend.
Among the more troubling of these mistakes has been the heightened economic policy uncertainty arising from the radical and chaotic manner in which import tariff policy and public spending cuts have been conducted.
One day, we have a 25 percent import tariff on Canada and Mexico. On the next day, there is a one-month pause. One day, Smoot-Hawley-style reciprocal import tariffs are imposed on some ninety countries. The next week the administration announces a ninety-day pause before those tariffs come into effect while trade deals are negotiated. One day, there is a 145 percent tariff on all Chinese imports with no exceptions, and the next day, there is a temporary carve-out for electronic imports. These drastic fluctuations make it impossible for companies to make investment decisions since they cannot be sure of the cost of their inputs.
Further generating uncertainty has been the chainsaw approach to public spending cuts. Many essential public sector workers are fired only to be rehired when it is realized that they are essential to the government’s functioning after all. In the meantime, government programs like USAID and the Voice of America have been shut down summarily. At the same time, the sword of Damocles is held over other agencies, engendering considerable public sector employee anxiety.
Little wonder then that we already have a number of signs that often precede a recession. Since Inauguration Day, the stock market has declined by some 15 percent, vaporizing around $6 trillion in stock market value. At the same time, consumer confidence has been dropping at a precipitous rate, inflation expectations are rising, investment decisions are being postponed, and merger activity and Initial Public Offerings have ground to a virtual halt.
Another basic mistake that the Trump administration is making is undermining confidence in both the U.S. government bond market and the dollar. It is doing so by doing little to correct the parlous state of the country’s public finances and by proving itself to be an unreliable partner for foreign countries by reneging on past trade agreements. At a time when the country is already running a 6.5 percent of GDP budget deficit and when the public debt to GDP ratio is well on its way to exceed its corresponding level at the end of the Second World War, the Trump administration keeps promoting budget-busting tax cuts.
The recent performance of both the bond market and the dollar should be ringing alarm bells in Washington. Normally when financial markets are unsettled, there is a flight to the safety of U.S. government bonds and the dollar. Not this time around. Over the past month, as U.S. and world stock markets sank, U.S. ten-year Treasury bond yield rose from under 4 percent to 4.5 percent while the dollar sank to nearly a three-year low against the Euro. These moves will increase the cost of mortgages and add to the inflationary pressure from higher import tariffs.
Yet, another policy mistake that the Trump administration is making is underestimating the spillover effects that will likely come to our shores from the upending of our main trade partners’ economies through an aggressive trade policy. Not only must we expect our export sector to be affected by weaker growth abroad and trade policy retaliation but also we must expect the stock market to take another hit from the lesser revenues that our companies earn from abroad. This would seem to be especially the case since the S&P 500 companies derive 28 percent of their overall revenues from abroad.
In short, there are now all too many reasons to expect a U.S. recession later this year. Tariff policy-induced economic uncertainty now delays investment and consumer spending; a tax increase is hitting households in the form of higher prices; equity and bond prices are being pummeled by a loss of faith in American economic exceptionalism; and the upending of the rest of the world economy will certainly have spillover on the U.S. economy. For all of these reasons, we have to hope that Mr. Trump makes an early and fundamental tariff policy U-turn. However, I would not suggest holding your breath for that to happen.
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