Is Trump Steering The U.S. Toward Recession? Harvard Economist Warns Of Global Impact And Chances Of U.S. Recession Thrice The Normal Rate
Donald Trump’s economic policies have always been disruptive, but his proposed tariffs and isolationist stance could push the US and potentially the world, toward economic turmoil. According to Harvard economist Jeffrey Frankel, the likelihood of a US recession is now triple the normal rate, with rising prices, uncertainty in capital formation, and a weakening dollar adding to the risks.
The President has made it clear that he plans to reimpose heavy tariffs on China, Mexico, and even close allies like Canada. While Trump frames these tariffs as a way to protect American jobs and manufacturing, history suggests they could do more harm than good. In his first term, retaliatory tariffs from China had a limited economic impact, but a second round which is potentially more aggressive, could trigger a full-blown trade war.
The result would be higher costs for businesses and consumers, weakened investor confidence, and the possibility of stagflation, a dangerous mix of slow growth and rising inflation.
Frankel warns that Trump’s unpredictable approach to trade and economic policy has already led to widespread uncertainty, which directly impacts capital formation. Businesses, unsure of long-term trade rules, are hesitant to invest in expansion or new projects.
If tariffs on Canada and Mexico are implemented, sectors like the US auto industry will bear the brunt of the impact, forcing manufacturers to pay at least 25% more for steel and potentially leading to job losses. While Trump’s supporters may initially back his economic measures, the negative consequences, such as increased prices and reduced corporate investment, may test their patience.
Adding to the instability is the unclear future of the US dollar. While Trump has expressed a desire to see a weaker dollar to boost American exports, he has also insisted on maintaining the dollar’s dominance in global trade. Thus, these contradictory goals create further economic uncertainty. Initially, markets responded positively to Trump’s policies, expecting higher interest rates and stronger fiscal stimulus. However, recent market jitters suggest growing concern over the long-term sustainability of his economic strategy.
Globalization Under Threat
Harvard economist Jeffrey Frankel further warns that Trump’s policies are actively dismantling the post-war global rules-based order that has underpinned decades of relative peace and prosperity.
These frameworks were designed to prevent the kind of economic nationalism that contributed to global conflicts in the past. However, Trump’s America First approach challenges these very foundations. As the US retreats from global leadership, other nations are forced to rethink their reliance on America, leading to reduced cooperation and greater economic fragmentation.
Likewise, while many business leaders initially welcomed Trump’s tax cuts and deregulation, the honeymoon period was short-lived.
The reality of trade wars, tariff hikes, and policy unpredictability has caused growing unease. However, as mentioned before, a significant portion of Trump’s voter base remains unfazed by economic details. For them, the image of a strong leader “shaking things up” resonates more than the tangible impact on their wallets. This disconnect between economic reality and political perception is probably one of Trump’s most enduring strengths and perhaps one of the greatest risks for the US economy.
Is the US Economy Headed for Trouble?
The early signs of economic strain are already evident. After outperforming its global peers in recent years, the US economy is showing clear signs of cooling. Analysts warn that Trump’s erratic policies, especially his aggressive stance on tariffs, are starting to take a toll.
While a full-blown recession (defined as two consecutive quarters of economic contraction) is not yet inevitable, concerns over a “Trumpcession” are mounting. The first 100 days of his return have seen a sharp drop in business and consumer confidence as companies brace for trade disruptions and rising costs.
To understand how the US economy is performing and what hurdles it might face, let us take a closer look at each of the parameters –
GDP Growth
The US economy had been on a strong growth trajectory, particularly in the post-COVID years, buoyed by massive stimulus programs such as the Biden administration’s Inflation Reduction Act. However, despite strong GDP numbers in previous quarters, Trump’s return brings new uncertainties. His tariffs and isolationist policies could stifle growth by raising production costs and limiting trade opportunities.
Trade Deficit
Ironically, despite Trump’s repeated claims of wanting to “fix” the trade imbalance, his approach could make it worse. The US goods trade deficit ballooned to $153.3 billion in January, largely driven by businesses rushing to import goods ahead of anticipated tariff hikes. Total imports soared to $329.5 billion, a clear sign that companies fear the impact of Trump’s trade policies on supply chains and costs.
US Gold Imports
A significant driver of the recent surge in US imports has been gold. Inbound shipments of “finished metal shapes,” including gold bars, have risen sharply as traders rush to get ahead of potential tariffs under Trump’s new economic policies. This influx is a defensive move, reflecting concerns over economic uncertainty and inflation risks.
Interestingly, while a widening trade deficit typically drags on GDP, gold presents an anomaly. Unlike goods that are consumed or used in production, gold bought for storage does not directly impact economic activity. As a result, the Atlanta Fed’s economic model may be overestimating the impact of imports on first-quarter GDP. Nevertheless, other indicators suggest that the US economy is losing momentum.
Inflation
Trump’s campaign rhetoric promised to bring prices down, vowing on day one to tackle inflation and halve energy costs within a year. The reality, however, has been more complicated. Official data shows that while the headline annual inflation rate dipped to 2.8% in February from an unexpected rise to 3% in January, concerns remain about long-term price pressures.
Energy costs have declined marginally by 0.2% year-over-year, but the Organisation for Economic Co-operation and Development (OECD) has issued a warning. The organization revised its 2025 US inflation forecast upwards to 2.8% from a previous estimate of 2.1% in December, citing Trump’s trade policies as a potential inflationary force. If tariffs on imports rise, businesses are likely to pass on higher costs to consumers, making it harder to tame inflation.
Employment
The US job market has been a bright spot in the economy, with unemployment reaching a 54-year low of 3.5% in early 2023. However, the latest figures indicate a slight uptick, with the unemployment rate now at 4.1%. While still historically low, the increase suggests a softening labor market.
Job creation remains strong, but sectors that were previously booming, such as technology and finance, are showing signs of slowing down. Wage growth has outpaced inflation since early 2023, helping households recover some of their lost purchasing power, but economists warn that a prolonged period of economic uncertainty could erode these gains. If businesses start tightening budgets amid fears of a slowdown, job growth could stall, dampening consumer confidence.
Stock Market
The US stock market has experienced a rollercoaster ride over the past few years, with tech stocks, particularly the “Magnificent Seven” (Alphabet, Amazon, Apple, Microsoft, Meta, Nvidia, and Tesla) leading the charge. Under Biden, markets surged as the economy rebounded from the pandemic. However, Trump’s election victory in November triggered another stock market rally, driven by investor expectations of tax cuts and deregulation.
The optimism, however, has been tempered by market jitters in Trump’s first 100 days. Concerns over tariffs, economic nationalism, and erratic policy decisions have rattled Wall Street. While some investors remain hopeful about pro-business measures, others worry that trade wars and inflationary pressures could derail growth.
The US Dollar
The US dollar had been strengthening against major global currencies, driven by a resilient economy and investor confidence. However, Trump’s policies have introduced new uncertainties.
Tariffs on imports could push inflation higher, potentially forcing the Federal Reserve to reconsider its stance on interest rate cuts. After reducing the benchmark rate by a full percentage point last year, the Fed may now be hesitant to make further cuts if inflation resurfaces. This dynamic has caused a recent pullback in the dollar’s value.
Historically, Washington has favored a strong-dollar policy, reinforcing the currency’s role as the world’s dominant reserve currency. Treasury Secretary Scott Bessent has reassured markets that this stance remains unchanged. However, Trump has argued that a weaker dollar could boost US manufacturing by making exports more competitive, a position that could introduce volatility in currency markets.
Manufacturing Costs
Business surveys indicate rising costs for US manufacturers, a key early indicator of inflation. The Institute for Supply Management’s (ISM) manufacturing Purchasing Managers’ Index (PMI) shows raw material costs climbing sharply in early 2025.
This trend suggests that supply chain disruptions, trade policy uncertainty, and tariff-related cost increases are starting to bite. Higher input costs could squeeze profit margins, leading to reduced production output and ultimately being passed on to consumers in the form of price hikes on finished goods. If sustained, this could create additional inflationary pressure, counteracting Trump’s promises of lowering costs.
Consumer Spending
One of the most concerning developments is the unexpected decline in US consumer spending. January saw a 0.2% drop, the first decline in nearly two years and the largest in four years. While extreme weather conditions, such as California’s wildfires and winter storms, likely played a role, analysts point to deeper issues.
Consumer sentiment has taken a hit amid rising economic uncertainty. With inflation lingering and interest rates still elevated, households appear to be tightening their belts. If this trend continues, it could signal broader economic trouble ahead, as consumer spending accounts for nearly 70% of US GDP.
The Last Bit
Trump’s economic policies may have rekindled optimism among some investors, but early warning signs suggest turbulence ahead. Rising gold imports signal fears of economic instability, inflation remains a concern despite official figures showing moderation, and consumer confidence is faltering. Meanwhile, stock market volatility and currency fluctuations add to the uncertainty.
While the economy remains resilient, cracks are beginning to show. Whether Trump’s second term will fuel further growth or push the US toward economic stagnation are the key concerns being closely watched.
