Trump tariffs threaten U.S. economy too

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U.S. President Donald Trump has started a trade war but he might not be happy with what it does to the stock market, economy and American people.

There have been plenty of dire predictions about how tariffs will hammer Canada’s economy, but just a few days into the trade war the spectre of recession in the United States has also reared its head.

Recession odds are rising on Wall Street, Bloomberg reports, as money managers and corporations struggle to cope with the volatility brought on by Trump’s tariffs.

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“With softer economic activity data in the U.S. and already weaker business and consumer confidence in recent weeks, the tariffs that came into effect on March 4th on Canada, Mexico and China are raising the risk of an even bigger hit to business and consumer confidence going forward,” JPMorgan strategist Nikolaos Panigirtzoglou told Bloomberg.

“In turn this raises the spectre of a U.S. recession and markets have naturally priced in higher probability.”

Since 25 per cent tariffs on Canada and Mexico went into effect on March 4, the effective U.S. tariff rate is now at its highest level since the 1940s, says Royal Bank of Canada.

“If these tariffs are kept in place in the months ahead, we expect to see slowing growth, an uptick in inflation, and a hit to consumer and business confidence,” said RBC economists Mike Reid and Carrie Freestone.

RBC does not expect a recession in the U.S., but if tariffs are left in place for three months or more, their economists predict growth will come to a standstill in 2025.

While the duration of tariffs is unknown, trade disruption is likely to continue this year, adding to uncertainty.

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“That uncertainty will continue to weigh on investment activity as businesses struggle to make decisions amid a noisy and volatile backdrop,” said RBC.

The manufacturing sector will be hardest hit because it is highly integrated with its neighbours, north and south.

Trump gave automakers a month’s reprieve on tariffs Wednesday, urging them to move their production within U.S. borders.

But reshoring is not as simple as it sounds, said Reid and Freestone. Moving production back to the U.S. would take significant amounts of capital and years to plan and execute, a feat particularly challenging when interest rates are high.

The need for new supply chains would increase these costs, and in the longer term, labour shortages would limit the production capacity of the new factories being built on American soil.

More than a quarter of the employees in U.S. manufacturing are over 55, and with the decline in immigration there will be fewer new workers to replace them.

Tariffs will also be a blow to Trump’s voter base. Prices for essentials like food and energy will rise, hitting low-income to middle-class households the hardest, because they spend more of their income on these essentials. After the pandemic the 25 per cent rise in energy prices felt more like 30 per cent to these households, said RBC.

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“Tariff-driven price increases will add to the pressure these households are still contending with and will erode consumer confidence further,” they said.

Is it worth it?

RBC estimates the tariffs now in place would boost U.S. revenues by about $300 billion, about a third of the annual cost of Trump’s proposed extension to the Tax Cuts and Jobs Act. But the actual amount will likely be smaller as demand drops for imports affected by tariffs.

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The White House says it’s not afraid of a trade war because exports make up only 11 per cent of the U.S. GDP, but as National Bank of Canada economists point out the same doesn’t hold true for its stock market. As today’s chart shows, foreign sales contribute 41 per cent of revenues generated by S&P 500 companies.

If the trade war leads to a declining stock market and widening corporate bond spreads, the negative wealth effect for investors and U.S. households could have a significant economic effect, said economists Stéfane Marion and Matthieu Arseneau.

“If the tariff war persists, we anticipate a notable drag on U.S. economic growth in the coming quarters,” they said.