What a tariff recession might look like
Add Axios as your preferred source to
see more of our stories on Google.
Illustration: Maura Losch/Axios
If the current level of tariffs remains in place, the U.S. appears likely to find itself in a recession.
- What's much less clear, however, is how severe such a recession would be, and therefore how much incentive the Trump administration has to try to avoid that outcome.
Why it matters: Even with the tariffs fully in place, any recession might be shallow enough — and early enough in the electoral cycle — for the White House to decide it's worth just riding it out.
The big picture: Goldman Sachs, whose economic team has been more accurate than most in recent years, now expects GDP growth of 0.5% this year — avoiding a recession, but barely so.
- That forecast assumes tariffs go up by 15 percentage points — a huge number, but still short of the 20 percentage-point increase that's in place as of Wednesday.
- If those stay in place, Goldman says it would then expect a recession, albeit a pretty mild one.
- The last mild recession in the U.S. was in 2001, when employment and corporate investment both fell in the wake of the dot-com bust. There weren't crisis-level financial dislocations like we saw in 2008-09 or in 2020.
Between the lines: Among forecasters expecting a recession, that mildness is a common refrain. Loomis Sayles, for instance, is now predicting a recession in 2025, with GDP growth of 0% for the year as a whole.
- "We are coming from strength," explains portfolio manager Pramila Agrawal.
How it works: It's important to remember that imports are not included in GDP — in fact they're the one term in the GDP equation that's negative, meaning, all other things being equal, that lower imports mean higher GDP.
- As such, it's not easy for falling imports to cause falling GDP — although, if tariffs are high enough, that's certainly possible, as domestic corporations pull back on investment in the face of greater uncertainty and higher input costs.
The other side: The future is murkier now than at any point since the spring of 2020, which is one reason why there's still no consensus that we're in or headed for a recession. The economic upsides include:
- Trump is talking about doing deals with various countries that could bring tariffs down.
- The Fed has plenty of room to cut — and Goldman Sachs expects a full 200 basis points of cuts this year if the tariffs remain fully in place. That said, if the tariffs prove inflationary, the Fed might decide to move very slowly.
- The Supreme Court and Congress both have the ability to strike the tariffs down.
The intrigue: We've never lived in a world of anything remotely close to 104% tariffs on one of our largest trading partners, which means the effects of such things are incredibly hard to model.
- "Can you really make a distinction between a 50% tariff and 100% tariff?" asks Tom Porcelli, chief U.S. economist at PGIM Fixed Income.
- Even at 54%, the tariffs on China are big enough "to thrust people to the sidelines and to delay corporate investment decisions, whether that's investment in capital expenditures or investment in hiring," he says.
- The further move to 104% might have some effects on trade and inflation, but in terms of economic activity the marginal difference could be pretty small.
- Another unknown: The degree to which Chinese exports would end up entering the U.S. via other countries with lower tariffs.
Where it stands: For the time being, China seems to be sticking to the Napoleonic principle that you should never interfere with the enemy when he is in the process of destroying himself — indeed, far from trying to negotiate tariffs back down, China is raising them even higher.
The bottom line: We're deep into uncharted waters, and standard economic modeling kits were not made for a world of 104% tariffs.
- Still, the consensus is for weak growth this year, or perhaps a mild recession.
- A major downturn on the order of 2008 or 2020, while possible, remains unlikely for now.
