Two months into his presidency, Donald Trump’s economic policies are raising concerns about a potential recession in the U.S.
Despite campaign promises of prosperity, Trump has warned of a “little disturbance” before wealth can be restored. Analysts are increasingly pointing to his policies, including tariffs and government spending cuts, as factors that could push the world’s largest economy into a downturn.
Recent data shows inflation easing, with prices rising 2.8% over the 12 months to February, down from 3% in January. However, economic forecasts suggest growing risks of a recession, with JP Morgan raising its odds from 30% to 40% and Moody’s Analytics increasing its estimate from 15% to 35%.
Market Turmoil and Rising Recession Risks
The S&P 500, which tracks 500 of the largest U.S. companies, has fallen to its lowest level since September, reflecting investor fears about the future. The market turmoil is partly driven by Trump’s tariffs on imports from America’s top trade partners, which analysts believe will increase prices and curb economic growth.
Goldman Sachs has also raised its recession forecast from 15% to 20%, citing policy changes as the “key risk” to the economy. The firm warned that if the White House remains committed to its policies despite worsening economic data, recession risks could rise further.
Tariffs and Uncertainty Weigh on Businesses
Tariffs, which impose taxes on imports, are creating uncertainty for U.S. businesses. Many companies are facing lower profit margins, delaying investments, and holding off on hiring as they try to navigate the changing economic landscape.
Brian Gardner, chief of Washington policy strategy at Stifel, noted that businesses initially viewed tariffs as a negotiating tool. However, Trump’s actions suggest a broader restructuring of the U.S. economy, which has fueled market volatility in recent weeks.
Signs of Economic Slowdown
The U.S. economy was already experiencing a slowdown, partly due to the Federal Reserve’s efforts to cool inflation by keeping interest rates higher. Recent data indicates a more rapid weakening, with retail sales falling in February and consumer confidence declining after a post-election boost.
Major companies, including airlines, retailers like Walmart and Target, and manufacturers, are warning of a pullback. Analysts worry that a stock market drop could further reduce spending, particularly among higher-income households, which play a significant role in driving the U.S. economy.
Federal Reserve Offers Reassurance Amid Uncertainty
Federal Reserve Chair Jerome Powell attempted to calm fears in a recent speech, stating that the U.S. economy remains in a “good place” despite elevated uncertainty. However, Kathleen Brooks, research director at XTB, warned that the U.S. economy’s deep ties to global markets make it vulnerable to disruptions caused by tariffs and other policy changes.
“The fact that tariffs could disrupt that at the same time that there were signs that the U.S. economy was weakening anyway… is really fuelling recession fears,” she said.
Tech Sector Faces Correction Risks
The stock market’s unease isn’t solely tied to Trump’s policies. Investors are also concerned about a potential correction in the tech sector, which has seen significant gains over the past two years driven by optimism about artificial intelligence (AI).
Chipmaker Nvidia, for example, saw its share price soar from less than $15 at the start of 2023 to nearly $150 by November. This rapid rise has sparked debates about an “AI bubble,” with investors wary of a potential burst that could impact the stock market regardless of broader economic conditions.
Tech analyst Gene Munster of Deepwater Asset Management noted that his optimism has “taken a step back” as recession risks have increased. “The bottom line is that if we enter a recession, it will be extremely difficult for the AI trade to continue,” he said.
The Possible Implications for the U.S. Economy
The combination of tariffs, market volatility, and slowing economic growth has heightened fears of a recession. While the Federal Reserve remains cautiously optimistic, the potential for policy missteps and external shocks continues to weigh on investor confidence.
As the U.S. economy manoeuvres these challenges, the focus will be on whether policymakers can bridge a balance between addressing inflation and avoiding a prolonged downturn of the economy.
