Trump’s self-inflicted recession begins to take shape

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The hard data doesn’t show it yet, but the United States could be in serious economic trouble.

President Donald Trump’s smash-and-grab agenda has introduced a confidence shock into an otherwise healthy economy. The national mood is darkening fast.

Soft economic indicators such as surveys of U.S. consumers, business leaders and investors give something of a real-time glimpse into business conditions. And the soft data has taken a hard turn for the worse, which traditional lagging indicators, such as growth in gross domestic product, have yet to reveal.

Sentiment is in free fall. Expectations for inflation and job losses are rising to dangerous levels.

The latest piece of damning evidence was Friday’s release of the University of Michigan’s consumer survey for March. It showed consumer confidence falling to its lowest in two and a half years and long-term inflation expectations at their highest since 1992.

A couple of months ago, weak survey results might have been dismissed as disgruntled Democratic voters registering their objection to last fall’s presidential election result.

But crucially, the bad vibes have begun to cross party lines.

“Republicans joined independents and Democrats in expressing worsening expectations since February for their personal finances, business conditions, unemployment and inflation,” survey director Joanne Hsu wrote.

If the soft data is to be believed – and it’s getting hard to refute – then the U.S. economy is on the cusp of major slowdown. Wall Street consensus has already begun to bank on a recession toward the end of the year. It appears much closer than that.

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Canadian policy makers have been saying all along that Americans will endure their fair share of misery because of Mr. Trump’s trade war.

The President himself acknowledged his tariffs could cause “a little disturbance” domestically. The broad-based economic damage suggested by the soft data is more than a little disturbance.

An imminent recession would seriously test the pain tolerance of the Trump administration so soon after taking power. The combination of job losses, falling stock prices and inflation would be a bitter pill to swallow for the 77 million Americans who voted for a pro-growth, business-friendly President who promised to slay inflation immediately and bring about a “golden age of America.”

“The problem is that we Americans don’t do pain very well,” market strategist Ed Yardeni said in a note to clients this week.

Nobody in charge stateside seems too fussed yet, though.

Federal Reserve Chair Jerome Powell spoke last week of how unreliable survey data has been this economic cycle.

These indicators incorrectly signalled a recession in 2023 and again last year. Maybe they’re wrong again?

“If that’s going to affect the hard data, we should know it very quickly,” Mr. Powell said. Everyone would have to wait and see.

But what were whispers of approaching danger have now become resonant. In the past three weeks alone:

• The University of Michigan survey showed that two-thirds of American consumers expect unemployment to rise in the year ahead, the highest reading since 2009. Inflation expectations for a year from now have seen three large monthly increases in a row and now sit at 5 per cent.
• The Conference Board’s index of consumer expectations for the future fell to its lowest level in 12 years. It sits at about 65, whereas 80 is typically the threshold that signals a recession ahead.
• Chief Executive’s CEO Confidence Index has dropped to its lowest ranking since the spring of 2020. Two-thirds of leaders polled said they have, or plan to, increase prices this year.
• Global outplacement firm Challenger, Gray & Christmas Inc. said planned job cuts leapt by 245 per cent last month to the highest level since July, 2020.
• Regional business surveys from the Federal Reserve Banks of New York, Philadelphia and Richmond point to slowing manufacturing activity and rising prices (both received and paid). “Admittedly, there is a whiff of stagflation in these numbers,” Mr. Yardeni wrote.
• A Goldman Sachs survey showed investor sentiment falling to its lowest level since the Federal Reserve began its rate-hike campaign in 2022.

In the order of economic shocks, a trade war is a bit unique in that it’s growth negative and inflation positive at the same time. Both forces are taking hold in the U.S. economy, if the surveys are correct.

The economic fallout is being compounded by Mr. Trump’s wild policy swings that are increasingly putting the business world on hold.

“With all this change, a dense fog has fallen. It’s not an everyday ‘forecasting is hard’ type of fog. It’s a ‘zero visibility, pull over and turn on your hazards’ type of fog,” Thomas Barkin, president of the Richmond Federal Reserve, said in a speech on Thursday.

The soft data points to a hard truth: Everyone suffers in a trade war, and we will all be made poorer for it, America included.