Yuki Iwamura/AP Photo
Consumer confidence in March was at its lowest level in a few years; consumers expect inflation to rise to 5 percent year over year, double the current path.
Investors got some ephemeral relief from Donald Trump’s tariff nonsense on Tuesday when Treasury Secretary Scott Bessent announced formal negotiations with Japan aimed at reaching an agreement, signaling that much of the tariff implementation was perhaps a prelude to a deal. But then Trump announced that an additional 50 percent tariff would be placed on China, in retaliation for their own retaliatory tariffs in response to the initial order, making clear that at least with respect to the world’s largest manufacturer, a trade war is far more likely. Stocks fell on that news. And today, the largest tariffs all take effect.
The important thing to understand is that the economy was spiraling in ways that Americans were feeling before the tariff announcements last week. And even if this pain were confined to equity markets—which it’s not—the possibility of a financial crisis could cascade that pain to everyone’s front door, as we saw in 2008.
Let’s set the scene of what the economy looked like on Liberation Day Eve. Inflation was rising at a rate close to expectations, but slightly hotter if you took out volatile food and energy prices. The threat of tariffs was likely moving the prices of durable goods higher, and even lower prices on eggs, which have plummeted on a wholesale basis (thanks mostly to—guess what!—imports), had not yet reached consumers.
There were pullbacks in spending, and consumer confidence in March was at its lowest level in a few years. In particular, consumers expect inflation to rise to 5 percent year over year, double the current path, and “two-thirds of consumers expect unemployment to rise in the year ahead, the highest reading since 2009.” A separate consumer confidence survey put the public mood at a 12-year low. And that’s an aggregate reading of Americans’ financial picture. More than 1 in 4 New Yorkers couldn’t afford basic necessities last winter, while auto repossessions were at the highest level in 15 years.
Though the March jobs report showed fairly brisk hiring, announced layoffs as compiled by Challenger, Gray were at their highest since the middle of the pandemic in July 2020. Cuts to federal workers, which have soared past 200,000, haven’t counted in the official job statistics yet because those employees are still getting severance.
Office vacancies in the first quarter of 2025 were at their highest level ever recorded, with 1 in 5 offices empty. Vacancies in multifamily housing (basically apartments) were at their highest level since 2010. And nonresidential construction spending, including commercial construction for things like manufacturing, was already plummeting by January. And if you read any government report, you’d find that orders and employment for manufacturing were collapsing by February, subsectors were seeing stalled or slower growth with continued shortages, and the entire sector was teetering. Even the service sector, less affected by the threat of tariffs, was having problems prior to the tariff announcement, with a lot of talk about “radical and erratic changes in U.S. government policies.”
There was a reason that the Trump administration was bracing the country for impact prior to April 2; the impact was already being felt.
The result of all this is that even before Liberation Day, respected analysts like the UCLA Anderson forecast had pronounced themselves on “recession watch.” Yardeni Research raised the chances of recession to 45 percent on March 31. Worries about stagflation—a combination of higher unemployment and higher inflation—were rampant. The Organisation for Economic Co-operation and Development and the Federal Reserve both slashed their global and national growth forecasts, respectively, in March. Some of this was in anticipation of the tariffs, but then the tariffs Trump issued were far greater than expected.
In other words, even under a relatively modest tariff scenario, the U.S. economy was sinking into quicksand. There was a reason that the Trump administration was bracing the country for impact prior to April 2; the impact was already being felt. And so all the recession calls that you’re seeing now are the product of an economy that appeared to be in a deceleration phase being hit with a rush of more suffocating actions from the White House. Liberation Day is not where any of this begins.
But how will we know that this is more than just a temper tantrum from Wall Street? There are the real-world effects, like a crash in the price of oil, which could lead to shuttering of exploration and a wave of bankruptcies. The smart analyst Bill McBride has some other indicators to follow: the year-over-year change in new home sales, for example, or heavy-truck sales. The stagflation risk means paying attention to the inflation and unemployment rates. Bank earnings, which will be released next week, is another area where softness can be found. (All of that data will be from before Liberation Day and the market sell-off.)
One bigger potential source of pain could come out of the credit markets. Before the tariff announcement, banks were tightening lending for commercial and industrial loans. (Some of this could be from the use of AI and machine learning in lending decisions.) A credit crunch means that businesses cannot invest or hire or grow to the degree they want. But the combination of a tight credit market and falling equities could be problematic for the financial system.
As economic historian Adam Tooze explains, the near-term problems could be seen in the bond market. We’d expect some companies to go bankrupt, and that prices of their corporate debt would skyrocket as the fear sets in. We’d also expect investors to pile out of stocks and into a perceived safe asset like Treasury bonds. But what if a hedge fund has borrowed money to make losing bets in the markets and needs to rustle up cash to pay off its creditors? That could mean they’ll sell the most liquid assets in their portfolios: U.S. Treasurys. If those sales overwhelm the flight to safety into Treasurys, there’s suddenly “no place to hide,” which could spawn panic.
The Federal Reserve could always step in to buy Treasurys and rebalance the market. That of course only works if the panic subsides, and a lot of that depends on investor confidence in Donald Trump. Tooze writes, “What if investors, both American and foreign decide, that they no longer wish to hitch their wagon to the empire of the mad king? What if they decide that the US is indeed exceptional, but that it is exceptional in rather nasty ways?” Then you could see a whole bunch of efforts to isolate the U.S. to hedge against mad-king risk, which could really collapse the dollar, and the American system.
Tooze cautions that this isn’t a likely scenario, but for what it’s worth, the dollar is currently falling, and the yield on Treasury bonds spiked overnight, amid rumors that foreign investors will sell off. So some of the steps Tooze mentioned are already starting to fall into place, and what happens from here will be an important indicator of how deep this could get.
It’s important to note that a reversal of course on tariffs would mitigate a lot of the damage, which is why Congress putting on the pressure for that reversal is important. This is a self-own, a crisis dictated by one authoritarian with a ridiculous way of seeing the world. But Trump’s policies were driving the country into a ditch since Inauguration Day, setting the stage for the fear and doubt we’re seeing right now. In other words, the risk before Liberation Day is magnifying the risk after.
