Millions of people voted for Donald Trump in hopes that he would bring down inflation and improve their economic prospects. Many of those voters have not gotten what they bargained for. Trump has not evinced much interest in lowering prices; he has instead pursued policies that are almost certain to raise them, namely his trade wars with U.S. allies. Trump and his administration have also shaken the broader economic picture by mass-firing federal employees and cutting government spending.
As consumer confidence sours and several economic indicators indicate trouble ahead, Trump and his administration have downplayed the risk of a downturn, sometimes even dismissed it — statements that have only made investors and consumers more anxious. But are we really on the verge of a serious slump, or is the American economy resilient enough to mostly withstand Trump 2.0? Mark Zandi, the chief economist at Moody, provides perspective on that question in a recent interview.
Tariffs and Rising Recession Odds
Mark Zandi recently raised his personal odds of a possible recession in 2025 to 35%, up from 15 percent in any given year. When asked if this is attributable mostly to Trump’s tariffs and tariff threats, his administration’s job cuts, or the general chaos and uncertain economic environment, Zandi responded:
It’s economic policy broadly, but at the top of the list of policies, I would put the trade war — that’s the most immediate and most significant. But the haphazard DOGE cuts to government jobs and funding is also playing a role. I think immigration policy hasn’t played much of a role so far, but probably will. And then just the general dysfunction, which is evident in the current battle over keeping the government open, and will become more clear in coming weeks when we get to the treasury debt limit. So there’s a lot of moving parts here, all of them contributing to significant uncertainty, but I think the thing that’s most worrisome is the trade war.
The trade war, haphazard cuts, immigration policy, and general dysfunction are all contributing to the uncertainty. The trade war is the most worrisome factor.
Worsening Economic Outlook Under Trump
Even if there isn’t a recession, is the overall outlook worse than it would have been if Trump hadn’t been elected? Is there anything positive he’s doing, or is it all negative indicators?
I think the economy’s prospects under any scenario are now worse than they would have been otherwise, if these policies had not been pursued. I’m sympathetic to the idea that we should take a good hard look at how government operates, work on reducing inefficiencies and if there’s any fraud, eliminate it. That all makes sense. And I’m sympathetic to taking a good, hard look at regulation. Goodness knows various regulations have been around for a long time and probably are no longer suited to addressing the issues that they were designed to. But it doesn’t feel like this is being done in a thoughtful way. It just feels very haphazard.
The economy’s prospects are now worse than they would have been if these policies had not been pursued.
The Chainsaw Metaphor
Zandi uses a metaphor to describe the current approach to economic policy:
The metaphor is the chainsaw. That’s exactly what’s going on, and that doesn’t feel like a productive way of addressing inefficiencies in government, making sure that we’re doing everything as well as we could as cost conscious as we should be. So I’m sympathetic to some of the objectives, but not with regard to the way these objectives are trying to be achieved.
He elaborates that while addressing fiscal problems is important, the current cutting approach could be counterproductive if it contributes to a recession, worsening the fiscal situation.
Focusing on Entitlement Programs
Zandi suggests focusing on entitlement programs to address the fiscal situation:
And if you really wanted to address the fiscal situation, the key thing you’d be doing would be focusing on the entitlement programs, Medicare and Medicaid and maybe Social Security. But you’re not going to make a lot of progress addressing the fiscal situation by cutting jobs and impacting non-defense discretionary spending.
Cutting jobs and impacting non-defense discretionary spending won’t make a lot of progress addressing the fiscal situation.
A Strong Economy Derailed
Despite the uncertainty, recent data on inflation and unemployment is pretty solid. The economy came into the year performing exceptionally and growing strongly, with GDP last year almost three percent and growth almost 4%. We created 2 million jobs. Unemployment was 4 percent across every demographic.
I can’t think of another example like this of somebody coming in and just single-handedly creating such a bad economic situation.
Zandi notes that if the president follows through on all the tariffs he’s discussed and articulated, most importantly the reciprocal tariffs, and then holds them there, other countries will retaliate, pushing the economy into recession later this year.
Pivoting and Political Pressure
Zandi believes there will be real pressure on Trump to reverse course:
Exactly. And that’s why my odds are 35. Because I don’t expect the president to go through with the reciprocal tariffs and hold them there. I think he will ultimately respond to the stock market and the economic data and the political pressure and the CEOs calling, and that — kind of like what he did in his first term — he’ll pivot, declare victory, and move on.
However, Zandi notes that Trump seems more reckless this time around and doesn’t have the same semi-cautious voices around him as before.
Consumer Sentiment and the Stock Market
Zandi emphasizes the importance of consumer sentiment and the stock market:
The bulk of the growth in the economy is coming from spending by the well-to-do, people with high incomes and high net worth that own a lot of stock. And they’re focused on their stock portfolios…So the stock market plays a central role, a much more central role now than it has historically, because of the current circumstances where the high-end well-to-do are driving the train.
He also notes that the Conference Board’s measure of consumer sentiment is down in the last couple of months, signaling yellow flares.
Biden’s Policies?
Zandi firmly places the blame for the current situation on Trump’s policies:
This is all self-inflicted. Again, the economy had its issues. There’s always issues. But coming into the year, it was performing exceptionally well. It was far and away the strongest economy on the planet.
He states it’s impossible to lay any of this at the feet of President Biden.
Conclusion
Mark Zandi’s analysis paints a concerning picture of the U.S. economy under President Trump’s policies. The increasing risk of recession, driven by trade wars, haphazard spending cuts, and general economic uncertainty, raises serious questions about the administration’s approach.
While the economy entered the year in a strong position, Trump’s policies threaten to derail this progress. The reliance on high-end spenders and the sensitivity of consumer sentiment to stock market fluctuations add further fragility to the economic outlook.
Whether Trump will pivot in response to economic pressures remains uncertain, but the analysis suggests that the U.S. economy faces significant challenges, and the decisions made by the administration in the coming months will be critical in determining the nation’s economic future. The interview underscores the importance of thoughtful, strategic economic policy and the potential consequences of reckless and haphazard decision-making.
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