Trump’s tariffs & mass-firing: Economists fear 'stagflation' is on the horizon

Ahead of the rollout of US President Donald Trump’s reciprocal tariffs, economists have warned that ‘stagflation’ is on the horizon in the United States.

Stagflation is a condition in which recession and inflation coexist. It is much harder to tackle for policymakers than inflation or recession alone.

Yardeni Research on Monday raised the odds of stagflation hitting the United States this year to 45 per cent from 35 per cent. This is the latest grim projection for the US economy. Over the weekend, Goldman Sachs raised the odds of a recession from 20 per cent to 35 per cent and Moody’s raised it from 15 per cent to 40 per cent.

Economists attribute such fears to Trump’s economic, trade, and employment policies, such as tariffs, mass-firing of public sector employees, and shutdown of government programmes. They say that warning signs are already flashing, such as falling consumer sentiment, falling stock markets, and persistent inflation.

In March, the S&P 500 fell 5.8 per cent, the tech-heavy Nasdaq 8.2 per cent, and Dow Jones 4.2 per cent.

What are Trump’s tariffs & why are they controversial?

The term ‘stagflation’ is a formed by merging stagnation and inflation. It refers to the situation in which economic growth remains stagnant, industrial production remains sluggish, unemployment remains high, consumer sentiment remains slow, and prices remain high and keep rising.

This means that both inflation and recession coexist — a double whammy. In such a situation, purchasing power of people keeps falling, cost of living keeps rising, and employment also declines.

For policymakers, stagnation is hard to tackle as traditional tools to tackle inflation and recession are tricky to be deployed. To tackle recession, traditional steps like lowering interest rate and releasing stimulus packages can worsen the existing inflation. On the other hand, traditional steps to tackle inflation, such as raising interest rates can worsen unemployment and adversely affect the existing recession.

On the inflation side, a rise in price is expected as importers would pass on the increased cost of goods to consumers. This is further expected to add to recessionary pressure as well with time as higher costs would likely lead to reduced consumer consumption, reduced industrial production, and reduced business investment. All of these things would drive down the overall economic growth and push the economy towards recession.

At the same time, Elon Musk-led Doge is expected to make 1 million Americans jobless via direct firings in the federal government and indirect actions, such as the cancellation of government contracts that make contractors and contractual workers jobless. The immigration crackdown is set to affect construction and agricultural industry that depends highly on migrants — both legal and illegal immigrants.

To sum up, Trump’s policies are contributing to a situation where estimates suggest that 1 million Americans are set to be jobless, food production is expected to be affected, and a recession is expected as consumption, industrial production, and business investment are expected to fall. The stage appears set for stagflation.

Can the US avoid stagflation?

Even before the rollout of the Trump’s reciprocal tariffs, classic stagflation trends are already visible, according to economists.

Trump’s policies, such as tariffs and mass-firing, are expected to add to both inflationary and recessionary pressures.

Louis Navellier, the founder of Navellier & Associates, told MarketWatch that “classic stagflation trends” have already arrived.

“We’re already seeing inflation before the tariff impact has arrived…On the surface, we have classic stagflation trends of elevated inflation and a slowing economy. The Fed has a problem if these trends continue, with inflation saying hold/raise rates and the economy saying cut,” said Navellier.

Among the flashing warning signs is the Personal Consumption Expenditures (PCE) data released last week.

Worries of stagflation increase when PCE data is combined with downbeat consumer-sentiment reading from the University of Michigan, whose survey also showed a significant rise in inflation expectations, notes William Watts in an article for MarketsWatch.

Watts cites economist David Rosenberg of Rosenberg Research as saying that inflation-adjusted PCE data net of government fiscal transfers has “virtually stalled out” and has increased just 0.1 per cent in each of the past three months and running at a “near-stall-speed” rate of just over 1 per cent year-on-year.

“This doesn’t exactly resemble the hallmark of a very tight labour market. Maybe this is what bond investors are seeing — more of the ‘stag’ and less of the ‘flation’,” Rosenberg was quoted as saying.

Citing faltering manufacturing activity and higher prices paid by purchasing managers, Yardeni Research President Ed Yardeni told Yahoo Finance that “the higher inflation part of stagflation is almost a certainty”. He directly blamed Trump’s policies.

“It’s really a shame that Trump is so willing to take a wrecking ball to the economy. It has been very resilient over the past three years in the face of the tightening of monetary policy,” said Yardeni.

Writing in Yahoo Finance, Alexandra Canal noted that data released by the Bureau of Economic Analysis (BEA) last week showed that consumers spent less than forecast and, when combined with weak survey and sentiment readings, this showed that “stagflation cracks are beginning to show up in hard economic data”.

However, Bank of America Senior Economist Aditya Bhave said that he would only be concerned if unemployment rises. If the US employment remains good, then he does not see a real risk of stagflation.

“I would get a lot more concerned if the labour market were to start to crack. As long as we’re generating job growth, we’re generating income growth, and then there’s room to spend,” Bhave told Yahoo Finance, who dubbed economic indicators as a “soft patch” instead of a sign of stagflation.

Bhave further said, “We see this as a soft patch. Nominal spending still looks OK. Most importantly, the labour market is holding up, and I won’t give up on the US consumer as long as the labor market holds up.”

The jobs report is due to be published this Friday and that should clarify further whether the risk of stagflation is real. Moody’s Chief Economist Mark Zandi, who has rasied the fear of recession this year from 15 per cent to 40 per cent, has said that anything south of 100,000 new jobs would be worrisome.

“Recession remains less likely than not only because layoffs remain low and job and income growth positive. This Friday’s jobs report for March will give us a sense of whether this continues. It is premature to expect much fallout from the trade war and Doge cuts in the jobs data, suggesting a monthly payroll job gain of close to 150,000. Anything south of 100k would be worrisome, and anything north of 200k would be welcome. But whatever the job number, as long as the tariffs and Doge cuts continue to mount, so too will the odds of recession,” said Zandi in an analysis.