Wall Street doubles risk of recession ahead of Trump's reciprocal tariffs

Ahead of US President Donald Trump’s rollout of reciprocal tariffs, Wall Street stands rattled about fears of a recession this year.

Over the weekend, Goldman Sachs raised the odds of a recession from 20 per cent to 35 per cent and Moody’s raised the odds from 15 per cent to 40 per cent.

A number of indicators stemming from Trump’s economic and trade policies are driving fears of a recession. As tariffs increase costs for consumers as well as manufacturers, as increased costs of imports are passed on to end-users, the resultant production and consumption slumps are expected to contribute to recessionary pressures on the economy.

Intensifying trade war and Doge cuts driving recession fears, warns Moody’s

In an analysis over the weekend, Moody’s Chief Economist Mark Zandi has said that intensifying trade war and dismantling of the federal government by Elon Musk’s Department of Government Efficiency (Doge) are behind increased odds of recession from 15 per cent to 40 per cent.

Among the warning signs are also last week’s report on consumer confidence, which is currently at a four-year low, and persistent high inflation, said Zandi.

Amid such warning signs, the only two things keeping recession far for now are low layoffs and positive income growth, said Zandi.

If these two factors also turn negative, then the recession is likely, suggested Zandi.

The jobs report scheduled to be published this Friday would give a better pitcure, according to Zandi.

“It is premature to expect much fallout from the trade war and Doge cuts in the jobs data, suggesting a monthly payroll job gain of close to 150,000. Anything south of 100K would be worrisome, and anything north of 200K would be welcome. But whatever the job number, as long as the tariffs and Doge cuts continue to mount, so too will the odds of recession,” said Zandi.

How tariffs and Doge cuts can cause recession

Technically, an economy is in recession if there is negative growth for two quarters. However, an economy is actually considered to be in recession when there is a broader economic downturn, which may include high unemployment and job losses, declining industrial production, and declining consumer spending.

Trump’s tariffs and the economic fallout of Musk-led firings and shutdown of government programmes have a real chance of ushering in a recession.

Increased costs of manufacturing and declining sales as a result of reduced consumer consumption may lead to businesses to cut investment. Such a situation is also expected to add to recessionary pressures.

Consumption slump is expected to have a particularly devastating effect regarding recession as consumption amounts to two-thirds of US economic activity.

Together, Musk’s firing of federal workers and contractors, and loss of economic activity as a result of shutdown of government departments and programmes, is expected to make nearly 1 million people unemployed. This would be the largest addition of unemployment in US history.

The stock markets have also been flashing warning signs as they have hit the six-month worst mark. On Monday, the S&P 500 was down by as much as 1.7 per cent, the Nasdaq fell by up to 2.5 per cent, and the Dow Jones lost up to 1.1 per cent.