Dive Brief:
- A policy of sweeping global tariffs enacted by the Trump administration has thrust the U.S. economy to the “precipice” of recession, Moody’s Chief Economist Mark Zandi said Thursday, putting odds of a downturn at 60%.
- “The U.S. is struggling under the weight of economic policy and, most specifically, global trade war,” Zandi said. “If the trade war doesn’t de-escalate soon — and when I say soon I mean weeks not months — I think the odds are high, better than even, that the U.S. economy and much of the global economy is going to suffer an economic downturn.”
- Import duties on virtually all U.S. trade partners will likely push up unemployment and may stoke inflation by as much as 2 percentage points, Zandi said during an Economic Club of New York webcast. Business and household optimism has slumped and a fall in consumer spending and other harm from plunging stock prices will “be quite powerful, and probably more powerful than in times past,” he said.
Dive Insight:
Moody’s is one of several organizations that have downgraded economic forecasts since Donald Trump announced sweeping import duties early this month. JPMorgan Chase also sees 60% odds of a U.S. recession in 2025.
The economy slowed during the first quarter before Trump, with an executive order on April 2, fully acted on his longstanding pledge to enact global tariffs.
Weakening manufacturing and household spending, along with falling consumer and business confidence, are among several factors that prompted the Federal Reserve Bank of Atlanta on Thursday to estimate that gross domestic product shrank 2.2% during Q1 after expanding 2.4% in Q4.
Trump administration trade officials have begun negotiations with their counterparts from several countries that on April 9 were granted a 90-day reprieve from high tariffs. Baseline 10% tariffs on goods from most U.S. trade partners remain in place, as do duties of 145% on imports from China.
“Every nation, including China, wants to meet!” Trump said Thursday in a social media post, referring to trade talks. He has said for months that import duties will help create jobs, revive U.S. manufacturing and improve the U.S. fiscal outlook.
The stakes of Trump’s future tariff decisions are high, Zandi said.
“The economy is on the precipice of going into recession, and will likely go into one, unless policy takes a very sharp turn here pretty quickly,” he said.
Former Treasury Secretary Lawrence Summers warned Thursday of four major costs from the tariffs.
“This is a major stagflationary shock,” he said, predicting that import duties will push up prices and undermine spending, employment and economic growth.
First, import duties will constitute a tax of more than $4,800 on U.S. households in the short-term, with a long-term setback of roughly half that, Summer said, citing research by the Yale Budget Lab.
Viewed another way, the harm to consumers will likely prove to be equivalent to a doubling in the price of oil, he said.
Second, Trump’s protectionist trade policy also “courts financial crisis,” Summers said during a webcast by the Peterson Institute for International Economics.
The tariff policy “has caused the pattern in U.S. financial markets to move from the traditional bastion of the global economy — where stock markets fall and bond markets rise as people seek insurance — to the traditional emerging market paradigm, where decreases in stock markets are associated with rising bond yields and rising revulsion to the local currency, which falls,” Summers said.
“Every emerging market financial crisis sees a country fall into that pattern, and that is even before you get to the issue, which certainly has to be recognized as a possibility, of large-scale selling of U.S. financial instruments by foreign reserve holders or those influenced by foreign governments,” he said.
Third, the tariffs will likely invite retaliation from trade partners, hamper the ability of the U.S. to leverage its cost advantages in global commerce, raise the costs of inputs for production and restrain the ability of U.S. companies to cultivate exports, he said. U.S. import duties “may have lasting and cumulative effects on the rate of growth,” Summers said.
Fourth, the Trump tariffs “have taken uncertainty to epic levels,” Summers said, noting that stock market volatility as measured by the Chicago Board Options Exchange’s Volatility Index, or VIX, has soared to a degree not seen since early in the pandemic and in 2008 during the height of the financial crisis.
“What we are seeing is an unprecedented and massive self-inflicted wound,” Summers said.