Do Tariffs Signal a Recession? Know the Signs

The recent imposition of significant tariff hikes by President Donald Trump has sent shockwaves through the financial markets, causing a downturn on the stock exchange and raising concerns among economists and Wall Street executives about a possible recession in the United States.
The tariffs, which are slated to be enacted on Wednesday, encompass a 10% duty on almost all international imports and additional taxes on goods from 60 countries. The size and speed of these increases, according to economists, are poised to disrupt the economy, even if partially mitigated by future negotiations.
Goldman Sachs economists have increased the likelihood of a U.S. recession to 45%, up from 35% previously, with their calculations considering potential negotiations to lessen or remove some tariffs. Should such negotiations fail, the forecast might tilt definitively towards a recession, according to Jan Hatzius, the chief economist at Goldman.
Similarly, other financial institutions are sounding the alarm, with JPMorgan indicating a 60% chance of recession and a prediction that inflation could climb to 4.4% by the end of the year, compared to the current 2.8%.
Should these tariffs persist, they are likely to elevate costs and increase uncertainty for businesses, potentially curtailing their willingness to hire or invest in new projects, while consumers might reduce their expenditures in response to higher prices. After an expansion rate of 2.8% in 2024, the economy might see a downturn.
Despite these concerns, recent economic measures remain stable, with March job additions surpassing expectations and layoff rates continuing at historic lows.
Yet various surveys reveal growing apprehension among businesses and consumers about the economic future, with observers from Wall Street to the Federal Reserve closely monitoring these concerns for signs of an economic downturn.
A major focal point is the real-time economy tracker from the Federal Reserve’s Atlanta branch, which indicates a possible annual rate economic contraction by 0.8% for the year’s first quarter, a significant drop from the 2.4% growth rate seen at the end of last year. This tracking mechanism updates with each new piece of economic data.
Recessions typically follow an economic shock, similar to the events seen with the 2020 pandemic or the 2007 housing bubble burst. The new tariffs, however, may not have the necessary impact to reverse the economy, although economists at Wells Fargo warn that the average tariff could leap tenfold to 23%, the highest since 1908, potentially disrupting global supply chains.
President Trump suggested that the economic actions might be necessary, likening them to taking medicine to resolve issues. Meanwhile, Treasury Secretary Scott Bessent downplayed recession fears, emphasizing the government’s focus on building strong economic fundamentals.
Signals that might indicate an emerging recession would include a consistent increase in jobless claims and spikes in unemployment. Despite low levels of unemployment applications, economists like Torsten Slok of Apollo point to signs of economic weakening, such as increased bankruptcy filings and reduced consumer activities like visits to Las Vegas or movie theaters.
Factors beyond tariffs could also slow economic growth, including announced federal job cuts and reduced government spending, which may negatively impact the economy. Moreover, the uncertainty of tariffs could cause businesses to withhold investments or expansions.
International responses, such as boycotts, might further affect the economy. Decreased travel from Canada, estimated at a 70% drop, could reduce economic growth by about 0.2 percentage points, according to Goldman Sachs.
Economic observers anticipate that the Federal Reserve might reduce interest rates in response, possibly as soon as June, with multiple cuts anticipated through the year. However, faced with existing inflation challenges, the Fed is in a complex situation, as tariffs might necessitate different policy actions than those typically used to stimulate the economy.
Fed Chair Jerome Powell has acknowledged that tariffs could exacerbate inflation, emphasizing the central role of maintaining price stability.
The official determination of recession timing is made by the National Bureau of Economic Research, which thoroughly evaluates economic trends across various metrics. However, such declarations often come long after recessions begin.