In recent weeks, the stock market has experienced a sharp downturn, with indices like the tech-centric Nasdaq entering a significant correction phase. This shift in the economic landscape has led to a reassessment by economists, with many revising their growth forecasts for the current year and expressing concerns over the potential for a recession.
Last week saw the Nasdaq drop by 10% from its peak, aligning with the definition of a correction, while the broader S&P 500 also moved closer to this threshold on Tuesday. This comes as a stark contrast to the situation a month ago, when stock indices were breaking records and consumer confidence was strong. At that time, business leaders were hopeful about the economic policies of President Donald Trump, expecting tax cuts and deregulation to enhance growth.
However, the focus has shifted as President Trump has implemented a series of tariffs and trade barriers against key trading partners of the United States. On Tuesday, he raised import taxes on steel and aluminum from Canada to 50%, an increase from the previous 25%, in response to tariffs imposed by Ontario on electricity imports to the U.S.
Despite these developments, the overall economy remains stable for now. Analysts suggest that while stock prices can fluctuate and temporary declines in the market typically don’t adversely affect the broader economy, the possibility of a recession remains relatively low. Goldman Sachs has predicted slower growth this year in comparison to last, but estimates a mere 20% chance of a recession occurring.
Concerns about a potential downturn are rising, fueled by Trump’s prioritization of tariffs over previous policy focuses like tax cuts and deregulation. During his first term, tax policy was the initial step before addressing import duties. Now, tariffs increase consumer prices, potentially suppress spending, and create an environment of uncertainty that could stifle business investment and hiring.
“The longer the tariffs remain, the higher the risk of a recession,” mentioned Luke Tilley, chief economist at M&T Bank/Wilmington Trust.
So, what exactly signals a recession could be on the horizon? At present, there are no definitive signs. One aspect causing concern is the Federal Reserve’s Atlanta branch’s real-time economic tracker, which now suggests an economic contraction at an annual rate of 2.4% for the first quarter of this year, driven by a surge in imports likely aimed at preempting tariffs.
While some economists project a continued economic expansion, albeit at a slower pace, a Harvard University economist recently posited a 50-50 chance of a recession. “Emphasis on tariffs and associated uncertainty has cooled demand and increased prices,” said the economist, forecasting potential inflation and economic slowdown.
Recessions typically stem from sudden economic shocks, like the COVID-19 pandemic in 2020 or the housing crash in 2007. It’s still uncertain whether current tariffs alone could trigger such an economic shock. Nonetheless, some experts suggest that a full-scale trade conflict sparked by Trump’s proposed tariffs could represent such a jolt.
In addition to tariffs, recent market declines can be attributed to President Trump’s noncommittal stance on a possible recession, as noted during a recent interview. Trump acknowledged a transitional period due to significant changes being enacted, contributing to market uncertainty.
Advisors in Trump’s circle have downplayed recession fears, asserting continued economic growth. The present tariffs are notably broader than those imposed previously, affecting all imports from major partners like China, alongside potential tariffs on Canadian and Mexican imports, as well as reciprocal measures on European, Indian, and Japanese goods.
Some economists believe the earlier duties may have impacted the manufacturing sector negatively, leading the Federal Reserve to reduce interest rates in 2019. Additional factors potentially burdening the economy include proposed cuts to federal jobs and spending by Elon Musk’s Department of Government Efficiency and decreasing government travel impacting airlines.
Signs indicating a recession might include rising unemployment and continued job losses. Although unemployment ticked slightly upwards last month, job gains suggest businesses are still recruiting, and applications for unemployment benefits remain minimal by historical standards.
Officially declaring a recession falls to the National Bureau of Economic Research, which uses various economic indicators such as employment, spending, and production to make this determination. It’s worth mentioning that the Bureau typically confirms a recession long after it begins, sometimes up to a year later.
