Trump's policies raise the risk of a U.S. economic recession

Experts warn that the United States is now in a period where even if it enters an economic recession, interest rates will remain high, which is a very typical period of stagflation.

Experts warn that the United States is now in a period where even if it enters an economic recession, interest rates will remain high, which is a very typical period of stagflation.

Recent economic data shows that U.S. consumer spending is weak, consumer confidence is extremely low, and inflation expectations have risen significantly. Since the beginning of this year, the performance of the U.S. stock market has been sluggish, and concerns about "stagflation" in the U.S. economy have intensified severely. So far this year, the S&P 500 Index has risen by only about 1%, while the MSCI World Index (excluding the U.S.) has risen by 5%. The performance of U.S. stocks is clearly lagging behind international markets.

Recent economic data shows that U.S. consumer spending is weak, consumer confidence is extremely low, and inflation expectations have risen significantly. Since the beginning of this year, the performance of the U.S. stock market has been sluggish, and concerns about "stagflation" in the U.S. economy have intensified severely. So far this year, the S&P 500 Index has risen by only about 1%, while the MSCI World Index (excluding the U.S.) has risen by 5%. The performance of U.S. stocks is clearly lagging behind international markets.

Data shows that within just two working days, the Atlanta Fed's GDPNow forecast for U.S. GDP (Gross Domestic Product) growth in the first quarter of 2025 has been significantly revised down by 510 basis points, plummeting from an increase of 2.33% to a contraction of 2.825%. The latest forecast, released on March 3rd local time, predicting a contraction of 2.83%, is the worst U.S. GDP forecast since the COVID-19 pandemic in 2020.

The beginning of President Trump's second term, compared to his first, has seen more frequent explosive headlines and more absurdly unsettling suspense, whether it be various tariff policies, immigration policies, foreign aid, oil policies, or reducing the size of the U.S. government, all of which have thrown the United States and even the world into chaos.

Former Lehman Brothers trader and founder of Bear Traps Report, Larry McDonald, pointed out that the Trump administration is deliberately triggering an economic recession to address (alleviate) the $36 trillion U.S. debt problem.

On March 2nd local time, "Oracle of Omaha" Warren Buffett made a rare statement, criticizing Trump's punitive tariffs as an "act of war" that would harm consumer interests.

In an interview released on March 3rd, McDonald stated that if interest rates remain at current levels, the U.S. debt interest next year will reach between $1.2 trillion and $1.3 trillion. This is much more than defense spending. Therefore, Trump needs to lower interest rates, and if they can reduce the rate by 1%, they could save nearly $400 billion in interest next year. No inflation cycle with an inflation rate over 6% has ended without unemployment reaching 5%, 6%, or even 8%. The U.S. government cannot curb inflation through massive fiscal spending; the Trump team knows this. They need to trigger a recession, only then can they lower interest rates and extend the debt maturity.

In the interview released on March 3, MacDonald stated that if interest rates remain at their current levels, the interest on U.S. debt next year will reach $1.2 to $1.3 trillion. This is much more than defense spending. Therefore, Trump needs to lower interest rates, and if they can reduce the rate by 1%, it could save nearly $400 billion in interest next year. No inflation cycle with an inflation rate over 6% has ended without the unemployment rate reaching 5%, 6%, or even 8%. The U.S. government cannot suppress inflation through large-scale fiscal spending; the Trump team knows this. They need to trigger a recession, as only then can interest rates be lowered and the debt term extended.

MacDonald warned that the U.S. is now in a period where, even if it enters a recession, interest rates will remain high, which is a very typical stagflation period. It is very similar to the situation from 1968 to 1981, when the market was basically flat.

MacDonald warned that the U.S. is now in a period where, even if it enters a recession, interest rates will remain high, which is a very typical stagflation period. It is very similar to the situation from 1968 to 1981, when the market was basically flat.

Mark Zandi, chief economist at Moody's Analytics, a subsidiary of rating agency Moody's, told Caijing that the U.S. economy seems to be mired in difficulties due to the chaotic economic policy-making of the White House. Uncertainty is weighing on the economy, with retail sales, manufacturing output, real consumer spending, home sales, and most notably, consumer confidence, all showing significant declines in the past one to two months. Real GDP has grown at an annualized rate of just 1.2% so far in the first quarter, and has been significantly revised down recently due to a series of weak data. According to tracking data from the Atlanta Fed, unless the economy picks up soon, GDP could actually turn negative this quarter.

Mark Zandi, chief economist at Moody's Analytics, a subsidiary of rating agency Moody's, told Caijing that the U.S. economy seems to be mired in difficulties due to the chaotic economic policy-making of the White House. Uncertainty is weighing on the economy, with retail sales, manufacturing output, real consumer spending, home sales, and most notably, consumer confidence, all showing significant declines in the past one to two months. Real GDP has grown at an annualized rate of just 1.2% so far in the first quarter, and has been significantly revised down recently due to a series of weak data. According to tracking data from the Atlanta Fed, unless the economy picks up soon, GDP could actually turn negative this quarter.

The trade war, cuts to jobs and government programs and agencies, and mass deportations are all creating chaos, thereby suppressing investment, hiring, and consumption. Even the Federal Reserve has said it has paused its rate hike policy until there is a clearer picture of the direction of economic policy. But this may take some time, given the imminent risk of another government shutdown and a debt ceiling crisis that is bound to cause market panic this spring. If lawmakers do not reach a consensus soon, the economy could go from "struggling" to "suffocating."

Tariff wars, cuts to jobs and government programs and agencies, and mass deportations of immigrants are all creating chaos, which in turn is suppressing investment, hiring, and consumption. Even the Federal Reserve has indicated that it has paused its rate hike policy until there is a clearer picture of where economic policies are headed. But this may take some time, as the risk of a government shutdown looms, and another debt ceiling crisis that could spook the markets is likely to play out this spring. If lawmakers cannot reach an agreement soon, the economy could go from "struggling" to "suffocating."

 

 

Growth Panic

Growth PanicGrowth Panic

 Jeffrey Young, former global head of foreign exchange at Citigroup and co-founder and CEO of DeepMacro, told Caijing that recent market movements reflect a growth panic, stemming from Trump's drastic reduction of the federal workforce and tearing up long-standing US foreign policy guidelines, along with the uncertainty about whether and when any offsetting measures related to structural fiscal spending cuts and deregulation will take effect. But if expectations for the US economy weaken, growth expectations for other countries would be even worse. The disruption to policy is destructive.

Jeffrey Young, former global head of foreign exchange at Citigroup and co-founder and CEO of DeepMacro, told Caijing that recent market movements reflect a growth panic, stemming from Trump's drastic reduction of the federal workforce and tearing up long-standing US foreign policy guidelines, along with the uncertainty about whether and when any offsetting measures related to structural fiscal spending cuts and deregulation will take effect. But if expectations for the US economy weaken, growth expectations for other countries would be even worse. The disruption to policy is destructive.

Currently, the Trump administration and the Department of Government Efficiency (DOGE) led by Musk have reduced the number of civilian employees in the federal government by more than 100,000 through layoffs and buyouts. It was previously reported that the Trump administration planned to cut nearly all 1,700 employees of the Consumer Financial Protection Bureau (CFPB) and "wind down" the agency, leaving only five statutory positions. The Securities and Exchange Commission (SEC) has sent an email notification to all staff, encouraging them to voluntarily resign or retire by April 4, with eligible departing personnel receiving a $50,000 bonus.

Currently, the Trump administration and the Department of Government Efficiency (DOGE) led by Musk have reduced the number of civilian employees in the federal government by more than 100,000 through layoffs and buyouts. It was previously reported that the Trump administration planned to cut nearly all 1,700 employees of the Consumer Financial Protection Bureau (CFPB) and "wind down" the agency, leaving only five statutory positions. The Securities and Exchange Commission (SEC) has sent an email notification to all staff, encouraging them to voluntarily resign or retire by April 4, with eligible departing personnel receiving a $50,000 bonus.

Before Trump's second term began, US Treasury bonds experienced a severe sell-off, reigniting the possibility of the benchmark 10-year US Treasury yield returning to 5%. Surprisingly, long-term bond yields fell back to around 4.5%, while the stock market saw significant volatility. After Trump's election, the US Treasury market priced in a lot of growth expectations, making the yield curve (Treasury yield curve) steeper. The market is now trying to digest (recession expectations), with the transition from a steep yield curve to a sharply flattening one.

Before Trump's second term began, US Treasury bonds experienced a severe sell-off, reigniting the possibility of the benchmark 10-year US Treasury yield returning to 5%. Surprisingly, long-term bond yields fell back to around 4.5%, while the stock market saw significant volatility. After Trump's election, the US Treasury market priced in a lot of growth expectations, making the yield curve (Treasury yield curve) steeper. The market is now trying to digest (recession expectations), with the transition from a steep yield curve to a sharply flattening one.

The market is gradually realizing that the policy mix of the Trump administration will place a more severe drag on economic growth, with cuts in government spending, reductions in budget deficits, and tariff policies all bringing significant uncertainty to the economy, potentially affecting growth. Due to concerns about the impact of import taxes, consumer confidence has fallen to its lowest level in four years.

The market is gradually realizing that the policy mix of the Trump administration will place a more severe drag on economic growth, with cuts in government spending, reductions in budget deficits, and tariff policies all bringing significant uncertainty to the economy, potentially affecting growth. Due to concerns about the impact of import taxes, consumer confidence has fallen to its lowest level in four years.

A major concern for 2025 is that Trump's agenda on tariffs, immigration, and additional tax cuts could exacerbate the already large budget deficit in the US. If buyers of government debt pull back, yields would spike, and Washington might be forced to take action to limit spending. Rising yields would increase borrowing costs for businesses, households, and the US government.

A major concern for 2025 is that Trump's agenda on tariffs, immigration, and additional tax cuts could exacerbate the already large budget deficit in the US. If buyers of government debt pull back, yields would spike, and Washington might be forced to take action to limit spending. Rising yields would increase borrowing costs for businesses, households, and the US government.

Trump's tariff remarks have dashed hopes of last-minute deals with two major trading partners to avert a trade war, intensifying concerns about the US economy. Photo by Jinyan

The March 3rd report from the Institute for Supply Management (ISM) showed a decline in US manufacturing survey data: The ISM Manufacturing Index fell from 50.9 (expansion) to 50.3 (still in expansion). The ISM survey data suggests that the optimism displayed by factory managers after Trump's election is turning cautious due to tariff threats and increasing geopolitical risks. Predictions for real personal consumption expenditure (PCE) growth and real private fixed investment growth in the first quarter were revised down from 1.3% and 3.5% to 0.0% and 0.1%, respectively. Data shows that the Federal Reserve's preferred inflation indicator, the core PCE price index, rose moderately in January.

On February 28th, data released by the US Bureau of Economic Analysis showed that the US Personal Consumption Expenditures (PCE) Price Index increased by 0.3% month-over-month and 2.5% year-over-year in January, in line with expectations. Excluding energy and food prices, the core PCE price index grew by 0.3% month-over-month, reaching its highest level since October 2024; the year-over-year growth rate slowed from 2.9% to 2.6%, hitting its lowest point since June 2024, also in line with expectations.

Data released by the U.S. Department of Commerce on February 28 local time showed that the preliminary value of the U.S. goods trade deficit in January expanded from $122 billion in the previous month to a record $153 billion. U.S. manufacturers and businesses were "stockpiling" ahead of Trump's increased tariffs on products from multiple countries. The data shows that U.S. exports in January amounted to $172 billion, an increase of $3.3 billion from December; at the same time, imports reached $325 billion, an increase of $35 billion from December, with imports far exceeding exports.

Several Wall Street figures pointed out to Caijing that the record trade deficit has heightened concerns about U.S. economic growth in early 2025.

 

 

Tariff War

Tariff WarTariff War

The U.S. stock market has been weak this year, partly due to investor concerns over high valuations of tech giants. On the other hand, investors are also questioning whether Trump's "America First" policy could trigger inflation and lead to slower economic growth. As of the close on February 28, the Nasdaq was down 2.4% for the year, the S&P 500 index rose 1.24%, and the Dow Jones Industrial Average gained 3.05%. During trading on February 28, the S&P 500 briefly erased all its gains for 2024.

Goldman Sachs issued a warning on the outlook for U.S. stocks, with strategist David Kostin pointing out that any rebound in the S&P 500 could be temporary, and the current position levels are still not enough to trigger a "tactical rally due to low positioning."

With the impending US tariffs, investors are cautiously weighing the risks of tariffs. On the 3rd, the three major US stock indexes all fell at one point, with the Dow showing the smallest decline, while small-cap stocks and the Nasdaq saw larger declines. Chip stocks generally fell, with Nvidia dropping nearly 4.3% at one point. Trump confirmed that starting from Tuesday, March 4th, local time, the US will impose a 25% tariff on goods imported from Canada and Mexico, and stated that for this action, the two neighboring countries have "no room (for negotiation)," and "everything is ready. These tariffs will take effect tomorrow." After Trump's confirmation, the decline in US stocks further expanded.

The Atlanta Fed's forecast for US economic growth has fallen to its most recessive level since the pandemic. Photo by Jinyan

ISM Manufacturing Business Survey Committee Chair Timothy Fiore (Timothy Fiore) stated in the latest announcement, "As demand slows, production stabilizes, and layoffs continue, our survey participant companies are experiencing the first operational impact of the new government's tariff policies. Due to the impact of tariffs, price growth has accelerated, leading to a backlog of new orders, cessation of supplier deliveries, and impacts on manufacturers' inventories."

Trump announced that the 25% comprehensive tariff on imports from Mexico and Canada will take effect on March 4. The latest research from the Federal Reserve Bank of Atlanta shows that Trump's proposed tariffs on imports from China, Mexico, and Canada will affect the consumer prices of food, beverages, and other goods. Companies typically pass on part of the tariff costs to consumers, which may lead to an increase in daily shopping prices for American consumers. If companies pass on half of the tariff costs, some consumer spending prices in the US could rise by 0.8%, and if they fully pass on the tariff costs, some consumer spending prices in the US could rise by 1.6%.

Tariffs could raise the price of US cars by up to $12,000, further squeezing consumers and causing serious disruption to the automotive supply network. Trump also recently accused the EU of taking advantage of the US, claiming that the purpose of the EU's establishment was to "harm the US." He announced a 25% tariff on European cars and other goods.

Moody's analysis indicates that a 10% tariff on game consoles imported from China would be almost entirely passed on to consumers, increasing the price of a $500 game console to $548.

Imposing a 25% tariff on cars imported from Canada and Mexico could exacerbate the car affordability crisis, which has already forced buyers out of the market. Even before the tariffs, the average sticker price of a car was approaching $50,000, an increase of over 20% compared to five years ago.

Imposing a 25% tariff on cars imported from Canada and Mexico could exacerbate the car affordability crisis, which has already forced buyers out of the market. Even before the tariffs, the average sticker price of a car was approaching $50,000, an increase of over 20% compared to five years ago.

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