Will Trump’s Tariffs Spur Recession? Four Chief Economists Weigh In | WSJ

Key Concepts

• Policy Uncertainty: Instability and unpredictability in government economic policies, particularly related to tariffs.
• Recession: A significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. Technically defined as two consecutive quarters of negative GDP growth.
• Tariffs: Taxes imposed on imported goods and services.
• Inflation: A general increase in prices and fall in the purchasing value of money. Measured by the Core PCE Index (Personal Consumption Expenditures Index).
• Core PCE Index: The Federal Reserve's preferred inflation gauge, measuring the prices paid by people for domestic purchases.
• Stagflation: A situation in which inflation is high, economic growth is slow, and unemployment remains high.
• Wage-Price Spiral: A macroeconomic theory used to explain the cause-and-effect relationship between rising wages and rising prices, or inflation.
• Federal Reserve (The Fed): The central bank of the United States, responsible for monetary policy.
• Dual Mandate: The Federal Reserve's responsibility to maintain both price stability (low inflation) and full employment.

Recession Forecasts and Probabilities

• The video discusses the increased uncertainty in the US economy due to President Trump's tariff policies. This uncertainty has led to concerns about a potential recession.
• "The Wall Street Journal" surveyed 64 economists in early April, finding a 45% probability of a recession within the next 12 months. This was before Trump paused his "Liberation Day" reciprocal tariff policies.
• KPMG's Diane Swonk estimated a 60% chance of a recession this year, noting the potential for a more severe recession than currently forecast.
• JP Morgan raised its recession probability from 40% to 60% following Trump's early April tariffs.
• One economist stated they were "close to 80% probability" of a recession, calling it their "baseline forecast" and criticizing the policy strategy as creating "uncertainty and chaos."
• Another economist put the odds of a recession starting in the next year or so at about 60%, emphasizing the damage that will occur once tariffs are implemented and passed through to consumers.

Impact of Tariffs on Inflation

• Federal Reserve Chair Jerome Powell believes tariffs could lead to a temporary or persistent rise in prices.
• The Fed's preferred inflation gauge, the Core PCE Index, was 2.8% higher year-over-year in February, above the 2% target.
• Economists predict the Core PCE Index could rise to around 4% by year-end due to tariffs.
• One economist mentioned the possibility of "massive shortages" and a spike in inflation if tariffs disrupt supply chains (e.g., a car missing a seatbelt due to tariff-related shortages).
• The video highlights the risk of a "wage-price spiral," where rising prices lead to rising wages, further fueling inflation. This is a major concern for central banks as it can lead to stagflation.

Stagflation Concerns

• Stagflation is defined as sluggish economic growth combined with high prices and unemployment, reminiscent of the 1970s in the US.
• The Federal Reserve's dual mandate (low inflation and low unemployment) makes stagflation a particularly challenging problem.
• Economists warn that tariffs could lead to both higher inflation and increased unemployment.
• One economist suggested that cutting rates in the face of rising inflation could "stoke a more pernicious bout of stagflation," arguing for a more cautious approach.
• The video suggests the Fed is willing to risk "slightly softer growth or a slightly softer employment picture" to prevent inflation expectations from becoming unanchored.

Potential De-escalation and Future Outlook

• Trump has shown signs of de-escalating some tariff policies, including the 145% tariff he imposed on Chinese goods.
• The best-case scenario involves the president backing down from the trade war. The worst-case scenario is that tariffs remain in place, leading other countries to believe they are permanent.
• To pull back recession forecasts, economists need not only a reduction in tariffs but also increased certainty about the future trajectory of trade policy.
• The video concludes by emphasizing the importance of "trust" in the market and the need for the US to define its role in the global economy.

Notable Quotes

• "The increase in policy uncertainty is likely freezing a lot of capital spending plans."
• "The policy strategy seems to be to create uncertainty and chaos."
• "Trust is the oil of the market machine. Without trust, you can't do transactions."