Is a Trump Recession on the Way?

Episode Summary

Executive Summary: The episode examines whether Trump-era tariffs and DOGE-related federal cuts are already slowing the U.S. economy. Economists Catherine Holston and Anna Wong argue tariffs and policy uncertainty could lift inflation and dent GDP, while DOGE may weaken payroll growth through direct layoffs and private-sector spillovers. Both see risk, but neither treats recession or stagflation as the base case unless tariffs persist.

Main Topics: Trump tariffs and trade policy shock (Priority: 5/5): The hosts and guests assess the direct and indirect economic impact of new tariffs on Canada, Mexico, and China, emphasizing inflation pressure and supply-chain disruption. DOGE/federal government cuts and spillovers (Priority: 5/5): Discussion centers on federal layoffs, contractor/grant exposure, and how uncertainty around DOGE could hit private payrolls even if direct federal job losses are modest. Trade and policy uncertainty as the bigger macro driver (Priority: 5/5): Both economists stress that uncertainty itself may matter more than the tariff level or direct layoffs, because firms delay hiring, investment, and spending when policy is unpredictable. Growth, recession, and stagflation risk (Priority: 4/5): The conversation weighs whether recent negative data point to recession or stagflation, with both guests saying recession is possible if tariffs stick, but not their base case. Fed reaction and inflation expectations (Priority: 4/5): The guests discuss how the Federal Reserve will judge whether slower growth feeds unemployment or whether tariffs unanchor inflation expectations, shaping rate-cut expectations. Market reaction and the end of the 'Trump bump' (Priority: 3/5): The episode notes that markets have reversed post-election gains, reflecting growing concern that aggressive policy moves may outweigh earlier optimism about tax cuts and deregulation. Longer-run policy mix under Trump (Priority: 3/5): Anna Wong frames the administration as pursuing a full package of smaller government, deregulation, and higher tariffs, arguing that short-term pain may precede any later fiscal benefits.

Key Arguments: Tariffs likely raise inflation: Catherine estimates the announced tariff scenario could add 50 bps to core PCE inflation in 2025 and another 20 bps in 2026; Anna gives a similar estimate of a 0.8% core PCE increase. Tariff uncertainty may matter more than tariff rates: Anna says trade policy uncertainty is at an unprecedented level, and Catherine argues persistent uncertainty can push up inflation expectations and depress growth. DOGE’s direct job impact is small relative to the economy, but the spillover to contractors and grant-funded firms could be significant if cuts continue or become unclear. Private-sector hiring may slow before layoffs show up in payroll data, especially in firms exposed to federal contracts and grants; Catherine’s scenario analysis shows a much larger risk if uncertainty persists through 2025. Recession is not the base case, but it becomes plausible if the 25% tariffs on Canada and Mexico remain in place, since supply-chain links with the U.S. are highly integrated. Stagflation is considered possible but not likely now because inflation expectations remain anchored and firms may have limited pricing power to pass through costs. The Fed is caught between weakening growth and rising inflation risk; a rate-cut cycle is more likely if growth softens without inflation expectations becoming unanchored. The administration’s economic strategy is internally consistent: shrink government, cut regulation, raise tariffs, and eventually rely on fiscal/deregulatory gains later in the term.

Data Points: Nowcast GDP growth forecast: from +2.3% to -3.0% annualized - Cited as a fast deterioration in a daily U.S. economy nowcast over one to two weeks Core PCE inflation impact from tariffs: +50 bps in 2025, +20 bps in 2026 - Catherine Holston’s estimate for the tariff shock scenario Core PCE inflation impact from tariffs: +0.8% - Anna Wong’s estimated increase from direct tariffs using a Fed-style general equilibrium model GDP impact from tariffs: -1.3% - Anna Wong’s estimate of direct GDP hit from tariffs Trade policy uncertainty index: 11 standard deviations above historical norms - Anna Wong’s description of current trade policy uncertainty severity Trade policy uncertainty relative to 2016: roughly 2x higher - Anna Wong says the current index is about double the level seen in 2016 Federal civilian employees: 2.4 million - Catherine Holston notes the size of the federal civilian workforce Federal contractors and grant-linked workers: more than 5 million contractors; another 2.4 million potentially connected to grants - Used to illustrate the broader labor-market exposure to DOGE-related actions Federal workers fired this year: 200,000 - Catherine’s baseline estimate, including deferred resignations Deferred resignation takers: 75,000 - Included within the 200,000 federal-worker reduction estimate Private payroll impact from DOGE uncertainty: 70,000 fewer jobs in March-May - Catherine’s estimate for near-term payroll growth reduction versus baseline Yearly private payroll impact under short uncertainty scenario: 50,000 fewer payrolls - Catherine’s scenario where DOGE uncertainty lasts about three months with catch-up hiring later Yearly private payroll impact under prolonged uncertainty scenario: 330,000 fewer payrolls - Catherine’s scenario if DOGE uncertainty continues through the rest of 2025 Market capitalization erased: $3.4 trillion - S&P 500 gains since Trump’s election were described as being wiped out amid tariff fears Tariffs on China: 20% - Discussed as part of the announced tariff structure Tariffs on Canada and Mexico: 25% - Discussed as the most economically disruptive piece if maintained

Pivotal Quotes: "Tariffs are about making America rich again and making America great again, and it's happening, and it will happen rather quickly." — Donald Trump (quoted in intro): Opening framing of the tariff agenda as a deliberate policy shift "The index is doubled the level of 2016, which means that uncertainty is through the roof." — Anna Wong: Explaining the trade policy uncertainty measure and its historical significance "I don't think it's overdoing it that there's a trigger point out there." — Catherine Holston: On the possibility that aggressive tariffs could push the economy into recession

Implications: Listeners should expect weaker growth, higher inflation risk, and more Fed caution if tariffs and DOGE uncertainty persist. Markets may stay volatile, and the key swing factor is whether the Canada/Mexico tariffs prove temporary or become durable.