Stock markets are tumbling, business optimism is declining, and economists are adjusting their growth forecasts downward. Some experts are even predicting an increasing likelihood of a recession. The tech-heavy Nasdaq index recently entered a correction phase, defined as a 10% drop from its most recent peak. The broader S&P 500 is also nearing that level, raising concerns about the overall economic outlook.
Just a month ago, stock indices were at record highs, consumer confidence was improving, and many business leaders were hopeful about economic growth under President Donald Trump. Optimism was largely driven by expectations of tax cuts and deregulation. However, recent aggressive tariff policies have shifted the economic landscape. On Tuesday, Trump raised import taxes on steel and aluminum from Canada to 50% in response to Ontario’s new tariffs on electricity exported to the U.S.
Are we heading for a recession?
At present, the economy appears stable, and stock market fluctuations alone do not signal a recession. Most analysts still believe the risk remains low. Goldman Sachs estimates slower growth this year but places recession odds at just 20%.
However, concerns are mounting as investors and economists recognize that Trump’s tariff policies are taking center stage. Unlike his first term, where tax cuts preceded trade restrictions, this time, tariffs are at the forefront. The shift in priorities is creating economic uncertainty, leading to fears of a potential downturn.
How tariffs could hurt the economy
Tariffs impact the economy in several ways:
- Higher prices for consumers: Increased import taxes raise costs on goods, leading to reduced consumer spending.
- Business investment Slowdown: Companies may delay expansion and hiring due to uncertainty and higher costs.
- Economic uncertainty: Frequent policy changes create unpredictability, discouraging economic activity.
“The longer the tariffs stay in place, the higher the risk of recession,” says Luke Tilley, chief economist at M&T Bank/Wilmington Trust.
Signs of a possible recession
No definitive signs indicate a recession is imminent, but some economic indicators have raised alarms. A key measure tracked by the Federal Reserve’s Atlanta branch recently projected a 2.4% contraction in the U.S. economy for the first quarter of the year. While not a formal forecast, this real-time tracker reflects weakening economic conditions, partly due to companies stockpiling imports in anticipation of higher tariffs.
Despite these concerns, most economists still expect moderate growth. JPMorgan projects a slowdown to 1% annual growth in the first quarter, down from 2.3% in the previous quarter. Still, some experts, like Harvard economist Larry Summers, estimate a 50% chance of a recession, citing inflationary pressures and uncertainty from tariff policies.
Market reactions and investor fears
Trump’s comments about a possible recession during a recent interview intensified market fears. When asked about the possibility of a downturn, he stated, “I hate to predict things like that. There is a period of transition because what we’re doing is very big. … It takes a little time.”
His advisors, however, downplay recession fears, maintaining that economic growth will continue. But investors remain cautious, particularly given the sweeping scope of Trump’s new tariff threats.
Why this time is different
Unlike Trump’s first term, the current trade policies are much broader in scope. The latest tariffs include:
- A 20% tax on all Chinese imports.
- Proposed 25% tariffs on imports from Canada and Mexico.
- Reciprocal tariffs on countries imposing duties on U.S. exports, including the European Union, India, and Japan.
Goldman Sachs estimates that average U.S. import tariffs could increase by 10 percentage points, five times the hike imposed in Trump’s first term. In 2018-2019, tariffs primarily targeted China and select industries, causing a slowdown in manufacturing. To counteract the impact, the Federal Reserve cut interest rates three times in 2019.
Other economic pressures
Beyond tariffs, other economic factors could contribute to a slowdown. Elon Musk’s Department of Government Efficiency (DOGE) is proposing widespread federal job cuts and spending reductions, which could weaken economic growth. Major airlines have also reported a decline in government-related travel, with Delta Air Lines citing weakened consumer and business confidence as a concern.
What signals indicate a recession?
The most obvious sign of a recession would be a rise in job losses and higher unemployment rates. Companies tend to slow hiring and lay off workers when they anticipate declining revenue. Last month, the unemployment rate ticked up slightly to 4.1% from 4%, though businesses still added 151,000 jobs, suggesting continued hiring.
Economists closely monitor weekly jobless claims as an early warning sign of layoffs. Currently, these claims remain low, indicating relative stability in the job market.
Who declares a recession?
Recessions are officially declared by the National Bureau of Economic Research (NBER), a group of economists that define a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
The NBER considers factors like employment trends, income levels, retail sales, and industrial production. However, official declarations often come long after a recession has already begun, sometimes taking up to a year to confirm.
Final thoughts
While the U.S. economy is not currently in a recession, rising concerns over tariffs, inflation, and market instability are increasing anxiety. If tariffs remain in place for an extended period, they could lead to reduced consumer spending, lower business investment, and ultimately, an economic downturn. Investors and policymakers will be closely watching employment data, consumer confidence, and market trends for further signs of trouble ahead.
