Tariffs + uncertainty = higher recession risk, as probabilities significantly higher today

Executive summary

• The odds of a U.S. recession in the next 12 months are clearly higher today despite the lack of broad weakness in the hard data currently. Quite simply, tariffs + uncertainty = higher recession risk.
• Counterarguments such as “the hard data is holding up, so there’s no recession in the offing” and “tariffs don’t cause recessions” are built on shaky foundations.
• The size and comprehensive scope of these tariffs fits the definition of “extreme stress” in our view, especially with a miniscule seven-day adjustment period.
• Uncertainty is the key. To wit, businesses remain in “wait & see” mode, which isn’t pro-growth for the economy. Meanwhile, countries are retaliating. The longer this saga lingers without more clarity, the greater the risk that demand will falter, which would result in job losses. Job losses are a requirement for a recession.
• Alas, odds are around 50% currently in our view, though it’s a fool’s errand to try to assign precise recession odds given such a fluid situation. There’s one immutable truth in economics and markets – everything’s fine until it isn’t. Change happens quickly.
• We would emphasize that a recession isn’t a foregone conclusion, particularly since the White House holds all of the cards and doesn’t need the cooperation or permission from others to adjust, reverse, delay, or restructure these tariffs.
• To be clear: while a quick reversal could avoid a recession, the damage has already been done to the near-term growth rate of the U.S. economy.  

What happened

This past week, the White House increased the baseline tariff rate to 10% globally from 2.5% previously. There are dramatically higher rates on larger key trading partners, including China tariffed at 54%, the European Union at 20%, Japan at 24%, Taiwan at 32%, South Korea at 25%, etc.

Our two largest trading partners Canada and Mexico weren’t subject to this round of tariff increases because of the United States-Mexico-Canada Agreement (USMCA). However, both are subject to the previously announced tariffs, such as 25% on autos as well as steel & aluminum, and 10% on Canadian energy resources and potash (fertilizer).

Accordingly, the average tariff rate will be roughly 20% just for these tariffs, not including the sector tariffs for steel & aluminum and automotive. With the inclusion of China, the trade-weighted rate jumps more than 20 percentage points to 22.5% from 2.2% previously.

Mushrooming risks

The swiftest reaction to the tariffs has been within the automotive industry, which had a one-week head start. For instance, Stellantis – the maker of Jeep, Ram, and Chrysler vehicles – has furloughed 900 workers at U.S. powertrain and stamping plants citing the new 25% auto tariffs, while also pausing production at some Canadian and Mexican plants. Similarly, Infiniti, which is owned by Nissan, has indefinitely paused production of the QX50 and QX55 models that are built in Mexico. Volkswagen Group (VW) paused rail shipments from Mexico and both VW and Audi will hold imported vehicles at U.S. ports until it figures out what to do next.

In addition to their direct parts suppliers, these actions by the automotive industry will cascade into the rail and trucking industries, illustrating how the consequences won’t be contained within a handful of manufacturing industries but can rapidly mushroom into fallout.

Retaliation

Several trading partners swiftly announced retaliatory tariffs. On Friday, China slapped 34% tariffs on all American made products. Canada responded with 25% tariffs on select U.S.-made goods, including fruits and vegetables, appliances, beer, wine, and liquor, along with autos not exempted under USMCA. The European Union announced duties of up to 50% on motorcycles, whiskey, and bourbon.

Additionally, there’s growing evidence of boycotts on American goods by foreign consumers. For instance, grocery chain Salling Group, which operates more than 1,700 stores across Denmark, Germany, and Poland, is now placing stars on the price tags to make it easier for shoppers to identify European brands.

In Canada, the Nova Scotia Liquor Corporation (NSLC) – the government-owned corporation that controls sales of alcoholic beverages in the province – removed all U.S.-made goods from their shelves. Furthermore, future air bookings from Canada to the U.S. have collapsed, specifically for the summer months (April through September 2025), are down significantly, down over 70% compared to the same period in 2024, according to travel data provider OAG. 

Our take

The size and comprehensive scope of these tariffs – more than quadrupling the minimum tariff on all imports with no exceptions – fits the definition of “extreme stress,” especially with a miniscule seven-day adjustment period. It’s too much, too fast for companies to make adequate adjustments.

Furthermore, the size and severity lead us to view these tariffs as an opening salvo by the White House. Kevin Hassett, Director of the National Economic Council, has publicly stated that 50 countries have reached out to negotiate tariffs. President Trump reiterated that notion, adding on Thursday that, “tariffs give us great power to negotiate.” That implies that the ultimate tariff rate should be lower.

More importantly, while knowing the maximum U.S. tariffs offers many details, it doesn’t provide the clarity that businesses need to move forward. Businesses will likely remain in “wait & see” mode since companies might as well wait for lower tariffs, particularly for larger purchases, which isn’t pro-growth for the economy. That raises the risk of a recession as the sour sentiment could bleed into the hard data, which has largely held up to this point.

Nevertheless, these tariffs are considerably larger than we anticipated. Accordingly, this appears to be a shock & awe version, perhaps to provoke swift compliance by global trading partners.

We would emphasize that a recession isn’t a foregone conclusion. The White House can adjust, reverse, delay, or restructure these tariffs at any time. Nor does it need permission from Congress, the time to negotiate, or cooperation from any trading partners.

That said, we would note that while a quick reversal or reduction could avoid a recession, the damage has already been done to the near-term growth rate of the U.S. economy. A temporary slowdown causing a decline in economic activity isn’t recession – it needs to be broad-based and be accompanied by job losses.

It also important to note that we don’t anticipate a full reversal of these tariffs. At the very least, the White House is likely to keep some comprehensive tariffs, albeit at a lower rate than proposed, along with the target sector for steel & aluminum and automotive.

Although companies delaying action is preferable to canceling plans, the longer this saga lingers without more clarity, the greater the risk that demand will falter, which would result in job losses. The aforementioned mushrooming risks portends a surge in job losses if companies and industries cascade. 

Hard vs. Soft: Everything’s fine until it isn’t

As we know, during times of extreme stress, hard data moves in a nonlinear fashion regardless of the prior trend. In other words, one day everything is fine, but it can totally collapse the next. We’ve repeatedly seen this dynamic – the two most recent examples are the COVID recession and the Great Financial Crisis, along with the Great Depression and other financial panics.

Additionally, there’s considerable evidence that American businesses and consumers have tried to front-run the all-out tariff blitz. For instance, rail carloads of motor vehicles jumped 8% in March and reached 17,745, the most since the pandemic (February 2020). That is more than likely automakers trying to take possession and pre-position inventory ahead of the new 25% auto tariffs, which started on April 3. Likewise, consumers rushed to buy cars ahead of auto tariffs as new sales jumped 11%. Those trends suggest a pull forward of demand, which suggests that sales probably won’t remain that brisk in the coming months, especially given the likelihood for higher prices and inventory disruptions.

Higher federal revenues from tariffs are a mirage

The tariffs as currently structured appear to contradict their stated objectives. Most prominently, either manufacturing comes back home or the U.S. gets trillions from charging tariffs over the next ten years, but both cannot be achieved. (Less imports because of more U.S. manufacturing would decrease tariffs revenues.) Meanwhile, the White House is quoting $6 trillion in revenues that will be used to offset tax cuts elsewhere.

Reshoring means higher prices

The push for reshoring means higher manufacturing costs – even if wages were exactly the same, which they won’t be – simply due to the billions needed to build new plants or refurbish old structures. While companies might not pass all of the higher costs along immediately, they won’t simply swallow higher costs indefinitely – implying prices on most imported goods are heading higher. And if companies decide to eat the costs, it would severely crimp corporate profits, which would likely curtail their payrolls.

Tariffs + uncertainty = higher recession risk

Treasury Secretary Scott Bessent has said, “Tariffs don’t cause recessions.” He’s partly correct – tariffs on their own don’t have to cause a recession. Yet massive uncertainty coupled with any major widespread policy change can trigger a recession, let alone the abrupt nature of their effective date. And both can be true. Thus, his rationale can be correct, but the implementation matters more for the economy. It’s hard to argue that the implementation of these tariffs has gone well.

Moreover, part of the “evidence” Bessent states is that “the U.S. put on steel & aluminum tariffs in 2018 and it didn’t cause a recession.” Aside from the fact that those were targeted and only impacted a small sliver of the U.S. economy, yes, those tariffs didn’t trigger a recession; however, Trump also partially removed those tariffs 15 months later for key partners, including Canada (nearly half of U.S. aluminum imports), Mexico, and Australia. Moreover, Canadian steel and aluminum exports to the U.S. have increased by 35% since 2018. Ultimately, it doesn’t matter if the rationale was “correct,” the U.S. can still have a recession in 2025. 

Bottom line

The President is doubling down on his plan to take aggressive action to rebalance trade. The specter of uncertainty remains, will continue to feed volatility in markets in the near term, and pushes near-term recession risks to around 50%.