Many economic analysts have recently revised their projections for U.S. economic growth downwards, which raises concerns about a potential recession stemming from President Trump’s announcement of “Liberation Day” on April 2. This adjustment seems warranted given the unexpectedly high tariff increases and a noticeable decline in consumer and business confidence metrics.
Following this, Trump postponed the enforcement of 90-day mutual tariffs, except for China, where tariffs were raised to 145%.
Recent economic data has provided strong indications of how the economy was faring up to April 2. It appeared quite robust prior to the announcement of the tariff increases.
Some reports have pointed to a genuine GDP contraction of 0.3% for the first quarter as a sign of economic frailty. However, this largely reflects how U.S. companies prepared for tariff hikes by front-loading imports, which decreases net GDP. Imports surged by 41% annually, largely driven by increased inventory and equipment purchases.
In mid-April, I reviewed the April Job Report and found that the economy was faring better than anticipated. Non-farm payroll grew by 177,000, with the unemployment rate remaining stable at 4.2%.
Since then, the U.S. stock market has bounced back from losses incurred post-April 2.
Investors are optimistic that the economy will strengthen as trade discussions progress before September. There’s a notable expectation that the U.S. will need to rescind some of the initial tariffs.
However, there are two critical factors investors should consider.
First, there’s usually a lag between when tariffs are announced and when their effects hit consumers and businesses. Tariff-induced price increases haven’t been widespread yet, and economists from Goldman Sachs suggest it may take a couple of months before the true impact is felt.
In the meantime, reports indicate that supply shortages might start appearing this month, marking the onset of tariff-related consumer impact.
Secondly, even if trade agreements are reached, they might end up being “in principle” rather than concrete contracts. According to a client report from Piper Sandler’s Andy Lapierre, it seems likely they will mainly address key contentious points, with little rollback of existing tariffs.
Trade agreements requiring legislation tend to be more complex, often taking around 18 months to finalize.
Despite this, the overarching 10% tariff still remains in place. China’s commitments appear more demanding than the previous 60% rate Trump had suggested, leading many investors to view the situation negatively before April 2.
Given these challenges, I remain doubtful about a robust U.S. stock outlook. The trade conflicts resemble those not seen since the 1930s, and despite a 5% drop in the S&P 500 Index this year, there’s little market pricing reflecting a slowdown.
For instance, FactSet reports that the consensus revenue growth forecast for the S&P 500 has dropped to slightly below last year’s 10.5%. However, this slower growth could have significant implications for the economy. Additionally, bank and non-bank credit accumulation could lead to potential spikes in defaults.
Still, it’s possible the U.S. won’t face a recession this year, considering the economy’s resilience in recent times.
When the COVID-19 pandemic struck in early 2020, the economy rebounded once businesses reopened, due in no small part to supportive fiscal and monetary policies. Similarly, forecasts predicting a recession were upended when the Federal Reserve raised interest rates from zero to 5.5% in 2022 and 2023.
This time around, however, the economic policies seem less robust compared to the responses during the 2008 financial crisis and the pandemic.
With inflation expected to exceed the Federal Reserve’s 2% target—thanks to tariffs—the Fed is likely to wait for signs of weakness in the job market before adjusting monetary policy. Given persistent inflation, rapid rate cuts seem unlikely compared to those previous two crises.
On the fiscal front, cooperation is less assured due to existing budget limitations. Currently, Republicans in Congress are aiming to cut federal spending by $1.5 trillion, with proposals targeting Medicaid.
The primary counteraction tool available would be tax cuts. However, the Wall Street Journal reports that crucial tax legislation must be finalized by July 4.
According to the IMF’s recent forecast, global economic growth is now expected to slow to 1.8% this year, a drop from an earlier forecast of 2.2%. U.S. inflation is projected to rise to 3%, significantly higher than earlier expectations. Thus, the tariffs Trump has imposed may affect the U.S. economy more severely than those of other industrial nations.
In conclusion, while the U.S. may dodge a recession this year, the risk of one looming increases with the ongoing trade tensions. Investors should brace for potential fallout from declining stock values and tariff increases that might weaken the dollar.
