The risk of recession has resurfaced, at least in many economist comments. Today, Alan Blinder, former vice chairman of the Federal Reserve, writes an op-ed in the WSJ that reflects my own thinking:
Trump Plays Recession Roulette With the American Economy
(…) My assessment of the probability of a recession in 2025 was about as close to zero as it could be. Everything looked too good. Since then, however, Mr. Trump’s actions seem designed to drive the U.S. economy into the ground. This would truly be a Trumpcession.
Start with high tariffs. The president’s press secretary may think tariffs are tax cuts. In fact they are tax increases—probably big ones. And any tax increase saps the purchasing power of consumers. Take away enough and you’re flirting with a consumer-driven recession—or stagflation, since tariffs also drive up prices. The stock market understands the peril and is dancing to tariff news. (…)
The negative reactions to Trumpian uncertainty may be even greater among businesses that must make hiring and investment decisions. (…) It makes sense for businesses to wait to see what happens. In the case of investments, waiting means both less aggregate demand today and less aggregate supply in the future. (…)
S&P Global’s March flash PMIs may seem to suggest that “apprehension begins to look overplayed” as Deutsche Bank wrote, but read carefully.
Services recovered some of the previous weather impacted slowdown while manufacturing output dropped back to negative territory after what seems like pre-tariff front loading.
The bizarre irony is that manufacturers, seeing stalling new orders, remain very optimistic on “hopes of stronger demand amid supportive trade and other policies, such as lower taxes”, while service providers’ optimism keeps falling on “concerns over the adverse impact of federal spending cuts, tariffs and wider policy changes from the new administration.”
Rather that trying to decipher what these two groups think or feel, let’s watch what they are actually doing:
- Manufacturers’ input buying “fell back into decline”. They are “cutting headcounts for the first time since last October.”
- Service providers’ “job creation was marginal, and much weaker than at the turn of the year”, reporting “sluggish demand”.
This is feeding the “stag” part in the stagflation scenario. Next Tuesday, S&P Global will provide its complete PMI and we will get the ISM survey for a more comprehensive picture.
For the “flation” part:
- “Across both goods and services, input costs increased at the sharpest rate for 23 months, surging especially in manufacturing (where the rate of inflation hit a 31-month high) but also picking up further pace (to an 18-month high) in the service sector. Higher costs were first and foremost attributed to tariffs”.
- “Higher costs fed through to a steeper rise in manufacturing selling prices, which rose in March at the sharpest rate for 25 months”.
- Service providers cut their margins reporting “the need to offer competitive prices in a weak-demand environment.”
Here’s the complete report:
U.S. Flash PMI: Output growth revives in March but confidence in the outlook deteriorates further
The headline S&P Global US PMI Composite Output Index rose nearly two points in March, up from 51.6 in February to hit a three-month high of 53.5, according to the preliminary ‘flash’ reading (based on approximately of 85% of usual survey responses). The index signals an acceleration of activity growth after slipping to a 10-month low in February. However, the rate of expansion remains well below December’s 32-month high.
The improvement was driven by the services economy, where output growth picked up momentum for the first time this year, having slumped to a 15-month low during February. The resulting rise in service sector output was the largest recorded so far this year, with companies reporting improved new business inflows amid some signs of strengthening customer demand and better weather compared to earlier in the year. Services exports acted as a drag on activity, however, declining for a third successive month. Manufacturing output meanwhile fell into decline, contrasting sharply with the gains seen in the first two months of the year (February’s rise in output was the largest recorded since May 2022). Factories reported fewer instances of output having been buoyed by the front-running of tariffs, and new orders growth came close to stalling in the goods-producing sector.
Input buying in the sector also fell back into decline. However, export sales showed the smallest decline for nine months thanks to rising orders in particular from Canada, Germany and other EU countries, hinting at some further efforts to fulfil orders ahead of tariff implementation.
Although current output growth picked up pace in March, optimism about the coming year fell for a second successive month. The decline took confidence to its lowest since October 2022 barring the nadir seen last September (when business was unsettled by uncertainty ahead of the Presidential election).
On one hand, sentiment about the future in manufacturing remained among the highest seen over the past three years, which factories commonly linked to hopes of stronger demand amid supportive trade and other policies, such as lower taxes. On the other hand, service sector confidence deteriorated for a third consecutive month, sliding noticeably from December’s one-and-a-half year high to its second-lowest since October 2022. The deterioration in service sector confidence was attributed to concerns over the adverse impact on demand for services and financial markets of federal spending cuts, tariffs and wider policy changes from the new administration.
Employment rose slightly in April, returning to growth after a small decline in February. The upturn was led by renewed hiring in the service sector. However, even here the rate of job creation was marginal, and much weaker than at the turn of the year. Some companies reported job losses due to sluggish demand plus a wariness to hire due to the uncertain outlook. Manufacturers in particular reported concerns over payroll numbers and rising costs, cutting headcounts for the first time since last October.
Cost pressures intensified across the economy in March. Across both goods and services, input costs increased at the sharpest rate for 23 months, surging especially in manufacturing (where the rate of inflation hit a 31-month high) but also picking up further pace (to an 18-month high) in the service sector. Higher costs were first and foremost attributed to tariffs, though increased staffing costs were also widely reported.
Higher costs fed through to a steeper rise in manufacturing selling prices, which rose in March at the sharpest rate for 25 months. The March survey also saw a modest acceleration in services selling price inflation, albeit to a level that was historically subdued as firms reported the need to offer competitive prices in a weak-demand environment. The resulting combined increase in prices levied by companies across both sectors was the second largest seen over the past six months – surpassed only by the rise seen in January – but remaining below the survey’s long-run average.
Commenting on the flash PMI data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
A welcome upturn in service sector activity in March has helped propel stronger economic growth at the end of the first quarter. However, the survey data are indicative of the economy growing at an annualized 1.9% rate in March and just 1.5% over the quarter as a whole, pointing to a slowing of GDP growth compared to the end of 2024.
Near-term risks also seem tilted to the downside. Growth is concentrated in the service sector as manufacturing fell back into decline after the front-running of tariffs had temporarily boosted factory output in the first two months of the year. Similarly, some of the March upturn in services was reportedly due to business picking up after adverse weather conditions had dampened activity across many states in January and February, which could prove a temporary bounce.
Business confidence in the outlook has also darkened, souring further from the buoyant mood seen at the start of the year to one of the gloomiest readings seen over the past three years, largely caused by growing worries over negative impacts from recent policy initiatives from the new administration. Most widely cited were concerns about the impact of Federal spending cuts and tariffs.
A key concern over tariffs is the impact on inflation, with the March survey indicating a further sharp rise in costs as suppliers pass tariff-related price hikes on to US companies. Firms’ costs are now rising at the steepest rate for nearly two years, with factories increasingly passing these higher costs onto customers. Thankfully, from the Federal Reserve’s perspective, services inflation remains relatively subdued, but this reflects the need to keep prices low amid weak demand, which will harm profits.”
Trade War Explodes Across World at Pace Not Seen in Decades Proliferating tariffs engulfing U.S., China and their partners draw parallels to 1930s protectionist spiral
Barriers to open trade are rising across the world at a pace unseen in decades, a cascade of protectionism that harks back to the isolationist fervor that swept the globe in the 1930s and worsened the Great Depression. (…)
Even before Trump retook the White House, many countries were increasing trade barriers, often against China, as they tried to beat back a flood of electric cars, steel and other manufactured goods pressuring their homegrown industries.
Now those efforts are proliferating as countries brace for a new wave of goods redirected across the globe by the U.S.’s rising tariff shield. The European Union said this month it plans to toughen measures to protect its steel and aluminum producers from imports diverted from the U.S. by Trump’s 25% tariffs on those two metals.
Economists and historians say the flurry of recent moves suggest the world could be heading toward the largest, broadest surge in protectionist activity since the U.S. Smoot-Hawley Tariff Act of 1930 touched off a global retreat behind tariff walls that lasted until after World War II.
Economists don’t think the world is headed for anything like the Depression of the 1930s, or a rerun of that decade’s collapse in global trade. Average tariff rates globally are still much lower than in the 1930s and 1940s.
But they do warn of lasting damage, both economically and diplomatically, as tariffs and other hurdles to trade increase. Among the risks: slower growth, higher inflation and a collapse in global cooperation that further fractures longstanding alliances. (…)
In addition to the many high-profile steps taken against the U.S. in recent weeks—including new Canadian levies on American computers and sports gear—many countries have been stepping up pressure on China.
In February, South Korea and Vietnam imposed stiff new penalties on imports of Chinese steel following complaints from local producers about a surge of cut-price competition. Similarly, Mexico has begun an antidumping probe into Chinese chemicals and plastic sheets, while Indonesia is readying new duties on nylon used in packaging imported from China and other countries.
Even sanctions-hit Russia is seeking to stem an influx of Chinese cars, despite warm relations between Russian President Vladimir Putin and Chinese leader Xi Jinping. Russia in recent weeks increased a tax on disposing of imported vehicles, effectively jacking up their cost. More than half of newly sold vehicles in Russia are Chinese-made, compared with less than 10% before its 2022 invasion of Ukraine.
“We do seem to be on the threshold of a much broader if not all-out trade war,” said Eswar Prasad, professor of trade policy at Cornell University and a former International Monetary Fund official. In this hostile new landscape, “it’s every country for itself,” Prasad said. (…)
According to the Tax Foundation, a think tank that scrutinizes tax policy, the average tariff rate facing goods imported into the U.S. is now back to where it was in 1946, at 8.4%, compared with 1.5% when Trump first took office in 2016.
If Trump follows through on all his remaining tariff threats, tariffs on U.S. imports could hit 18% on average, Fitch Ratings estimates—the highest level in 90 years. (…)
The fallout of the widening trade war might be less painful today than during the 1930s, given changes in the world economy. For many rich nations, services are more important than goods, and central banks and governments have learned valuable lessons about stabilizing economies with stimulus. (…)
The global economy is already fracturing into blocs, with capital and trade flowing increasingly between geopolitical allies, according to the IMF.
Fitch Ratings said last week it expects global economic growth to slow this year, to around 2.4%, from 2.9% in 2024, citing the likely effects of the escalating trade war in the U.S. and beyond. (…)
Returning to the level of openness to trade that existed a decade ago will be tough, assuming countries even wish to do so. The world’s trade referee, the WTO, has been sidelined by Washington, which has accused it of overreach into domestic-policy decisions and refused to approve judges to its top appeals panel since 2019. The big, multilateral efforts to reduce trade barriers that the WTO once shepherded are likely a thing of the past. (…)
Bringing down trade barriers once they go up is hard, said Douglas Irwin, professor of economics at Dartmouth College and the author of a history of U.S. trade policy. That is because every trade restriction is a potential bargaining chip, so no one wants to “unilaterally disarm,” he said.
Throw in geopolitical rivalries, especially with China, and domestic priorities such as rebuilding industries and rearming, and the chances for dialing back the current protectionist fervor look slim.
“That is why I worry the de-escalation scenario is a really tricky one,” Irwin said.
If you missed it, my March 21 post chronicled the Smoot-Hawley era. History does rhyme…
Trump Says Auto Tariff Coming, Teases Reciprocal Duty Breaks
President Donald Trump said he will announce tariffs on automobile imports in the coming days — and indicated nations will receive breaks from next week’s “reciprocal” tariffs.
Trump’s comments at the White House Monday sowed further confusion about his plans for a sweeping tariff announcement scheduled for April 2. The president told reporters he planned to proceed with long-threatened auto import tariffs “fairly soon, over the next few days” ahead of the broader package. (…)
“I may give a lot of countries breaks,” Trump said. “They’ve charged us so much that I’m embarrassed to charge them what they’ve charged us, but it’ll be substantial, and you’ll be hearing about that on April 2.”
Trump also said he planned to proceed with sector-specific tariffs on lumber and semiconductors “down the road,” without elaborating. Earlier Monday, he repeated his threat to impose duties on pharmaceutical drugs and said they would come in “the very near future.”
On top of that, Trump announced on social media he would charge a 25% tariff on other nations purchasing Venezuelan oil starting on April 2.
The president’s barrage marked the latest example of his erratic approach to trade policy, which has frazzled investors and foreign governments. (…)
“Helter-skelter” is a term used to describe disorderly haste, confusion, or chaos. That seems to be descriptive of the modus operandi of President Donald Trump’s trade policy. Then again, perhaps there is method to the madness. Perhaps it is Trump’s approach to the art of the deal. So the chaos is a feature and not a bug of his style of dealmaking. The technique is to bully his opponents by threatening to harm them, then wait for them to come back with offers to please him in order to win his forgiveness. (…)
The stock market rallied on Friday and today on news that Trump’s tariffs will be flexible and negotiable. Yet today he also said countries that purchase oil and gas from Venezuela will face a 25% tariff on the trade those nations have with the US. China was the largest destination for Venezuelan crude last year, followed by the US, India, and Spain. So is Trump really about to slap China with a 25% tariff on top of the 20% he already imposed? Beats us! (…)
(…) So what exactly is the idea behind the reciprocal tariffs that will liberate us?
The idea of reciprocity is simple — even “beautiful,” as the president puts it. Compared to the various plans Trump has aired for blanket tariffs on particular sectors, like those in place on steel and aluminum, they are also far lighter, creating less disruption for the economy and generating much less revenue for the Treasury. Strategas Research Partners’ Dan Clifton estimates sectoral tariffs are roughly twice the size of likely reciprocal tariffs. That’s because, as revealed in UBS research that Points of Return covered earlier, the US is not that hard done by, and its main trading partners’ tariffs are already reciprocal. In general, they’re the countries with which the US already has free trade agreements.
Further, reciprocity is difficult, as products can be subdivided any number of ways. Morgan Stanley’s economics team comments that “to define reciprocity at a product or sector level requires excruciating details not only around product classification but also how products are treated by domestic policy.” They are also further subject to override or amplification by the president after companies and countries have lobbied him. (…)
The administration must also convince investors and businesses alike that these tariffs won’t hurt the US. “Countries that sell to the United States are inflexible. They’ve only got the United States to sell to,” Stephen Miran — chairman of the Council of Economic Advisers — told Bloomberg TV on Monday. “So they’re the ones who bear the burden of these tariffs.”
This is a good point, but may prove to be overstated. US trading partners are already scurrying to find alternative markets, and to rebuild their own capacity. The European attempt to rearm is only the most spectacular example. But as a broad rule, US tariffs should indeed hurt others more than they hurt the US.
At least initially.
(…) “I don’t think there is going to be material short-term pain from the tariffs,” Stephen Miran, chair of the White House Council of Economic Advisers, said Monday in a Bloomberg Television interview with Saleha Mohsin. “US consumers are flexible. We have options. We can produce stuff at home.” (…)
“Countries that sell to the United States are inflexible — they’ve only got the United States to sell to,” Miran said. “So they’re the ones who bear the burden of these tariffs, which means that there’s going to be very limited pass-through into downside economic risk or into higher prices.” (…)
FLEXIBILITY WATCH 
- Investors are not showing much flexibility, are they? (Apollo)
- Citing data from Citigroup, Bloomberg relays today credit card spending on luxury products ebbed 5% year-over-year in February, while the share of consumers drawing annual salaries of at least $150,000 who are 60 to 89 days delinquent on their debts doubled in January relative to 2023 according to VantageScore. That compares to a 30% uptick in such slow-payments from lower income consumers over that period. “If you start seeing that this [higher-income] group is coming under more pressure, that may well [paint] a concerning picture for how consumer spending is going to evolve,” VantageScore chief economist Rikard Bandebo tells Bloomberg. (ADG)
- A little-noticed Trump administration move will decrease the minimum wage for federal contractors, rolling back a boost that helped hundreds of thousands of workers. The Labor Department [last Thursday]said it would no longer enforce the $17.75 per hour minimum wage for federal contractors set in an executive order from President Biden. The wage move affects employees of companies that contract with the federal government, such as janitors and food service workers. The reversal puts back in place a minimum wage of $13.30 per hour, set in an executive order from President Obama and left mostly intact by the first Trump administration. (Axios)
- The share of consumers who expect unemployment to rise over the next year surged to 66% in March, the highest level in a decade, per University of Michigan data analyzed by Bank of America Institute.
Data: University of Michigan survey of consumers via Bank of America Institute. Chart: Axios Visuals