Trump Is Designing His Own Recession

Millions of people voted for Donald Trump in hopes that he would bring down inflation and improve their economic prospects. Many of those voters have not gotten what they bargained for. Trump has not evinced much interest in lowering prices; he has instead pursued policies that are almost certain to raise them, namely his trade wars with U.S. allies. Trump and Elon Musk have also shaken the broader economic picture by mass-firing federal employees and cutting government spending. As consumer confidence sours and several economic indicators indicate trouble ahead, Trump and his administration have blithely acknowledged the risk of a downturn, sometimes even seeming to welcome one — statements that have only made investors and consumers more anxious. But are we really on the verge of a serious slump, or is the American economy resilient enough to mostly withstand Trump 2.0? I spoke with Mark Zandi, the chief economist at Moody and a frequently cited voice on the country’s financial health, for perspective on that question.

You recently raised your personal odds of a possible recession in 2025 to 35 percent, up from 15 percent in any given year. Is this attributable mostly to Trump’s tariffs and tariff threats? Is it mostly about his administration’s job cuts? Or is it just the general chaos and uncertain economic environment he has created?
It’s economic policy broadly, but at the top of the list of policies, I would put the trade war — that’s the most immediate and most significant. But the haphazard DOGE cuts to government jobs and funding is also playing a role. I think immigration policy hasn’t played much of a role so far, but probably will. And then just the general dysfunction, which is evident in the current battle over keeping the government open, and will become more clear in coming weeks when we get to the treasury debt limit. So there’s a lot of moving parts here, all of them contributing to significant uncertainty, but I think the thing that’s most worrisome is the trade war.

Obviously recessions have a specific meaning. But even if there isn’t one, do you expect the overall outlook to be worse than it would have been if Trump hadn’t been elected? Is there anything positive he’s doing, or is it all negative indicators?
I think the economy’s prospects under any scenario are now worse than they would have been otherwise, if these policies had not been pursued. I’m sympathetic to the idea that we should take a good hard look at how government operates, work on reducing inefficiencies and if there’s any fraud, eliminate it. That all makes sense. And I’m sympathetic to taking a good, hard look at regulation. Goodness knows various regulations have been around for a long time and probably are no longer suited to addressing the issues that they were designed to. But it doesn’t feel like this is being done in a thoughtful way. It just feels very haphazard.

The metaphor is the chainsaw. That’s exactly what’s going on, and that doesn’t feel like a productive way of addressing inefficiencies in government, making sure that we’re doing everything as well as we could as cost conscious as we should be. So I’m sympathetic to some of the objectives, but not with regard to the way these objectives are trying to be achieved.

Usually the metaphor is the scalpel and the hatchet. A chainsaw is much worse.
Exactly. And you could make a case that we have a fiscal problem. Our deficits are too large in a time when we’re at full employment, the debt load is high and rising, interest payments are becoming a disconcerting share of the government’s budget, and that’s going to continue. So that all makes sense. But the kind of cutting that’s going on now — I don’t think it gets you there. And it certainly could be counterproductive if it does contribute to a recession, because if you go into a recession, that’s just going to make the fiscal situation even worse. It undermines revenues, and it causes spending to rise automatically due to the income support program. So it’s just not a productive way of going about addressing our long-term fiscal situation.

And if you really wanted to address the fiscal situation, the key thing you’d be doing would be focusing on the entitlement programs, Medicare and Medicaid and maybe Social Security. But you’re not going to make a lot of progress addressing the fiscal situation by cutting jobs and impacting non-defense discretionary spending.

Well, don’t worry, Elon’s coming for Social Security next.
Yeah, that’s what I understand.

All that “fraud and waste.”
Yeah, right. Hundred-year-olds.

Despite all of this uncertainty, the recent data on inflation and unemployment is pretty solid. I was reading Justin Wolfers’ arguments on why recession fears may be overblown. He wrote that “the hard numbers tell us that the economy is in very good shape.” Do you agree? And do you expect that to last in the next couple of months? Because obviously we’re just beginning to understand the effects of all these haphazard policies.
The economy came into the year performing exceptionally and growing strongly. GDP last year was almost three percent, and growth was almost percent. That’s a really good year. We created 2 million jobs. That’s a lot of jobs. Unemployment was 4 percent across every demographic. That’s very low. And it’s been there now for three years, which is just extraordinary. We have our problems, but the top-line performance of the economy arguably couldn’t be better coming into the year, so it would take a lot to diminish and derail it. But that’s what’s happening.

I can’t think of another example like this of somebody coming in and just single-handedly creating such a bad economic situation.
Yeah, recession by design. It will take a lot to push the economy off the rails, but if the president follows through on all the tariffs he’s discussed and articulated, most importantly the reciprocal tariffs, and then holds them there — not on again, off again, but says, “Okay, here’s the tariffs and we’re sticking to them” — other countries will retaliate. They already are. Once they realize that these tariffs are going to be around for a while, they’re going to respond in kind. Forget about all the other economic policies and everything else going on, that would be enough to push the economy into recession later this year.

At that point, you’d think there’d be some real pressure on Trump to reverse course. I think the open question is, how loud will that chorus be of Republicans and allies saying, “What the hell are you doing?”
Exactly. And that’s why my odds are 35. Because I don’t expect the president to go through with the reciprocal tariffs and hold them there. I think he will ultimately respond to the stock market and the economic data and the political pressure and the CEOs calling, and that — kind of like what he did in his first term — he’ll pivot, declare victory, and move on.

Yeah. Although he seems more reckless this time around, and he doesn’t have the same, semi-cautious voices around him as before, the Gary Cohn types. He has Howard Lutnick and Peter Navarro.
That’s why back in 2019, I wouldn’t have put a 35 percent probability on recession. And now it’s 35 percent and rising with each passing day. But he’s very good at pivoting. You got to give him credit. I mean, he will pivot, and he pivots hard and figures out how to sell it. And so when push comes to shove, I still expect that, but I don’t say that with any confidence.

You must talk to a lot of other economists and policymakers and business people in your position. A lot of business leaders are reportedly freaking out in private, but hesitant to say much in public because they don’t want to draw Trump’s ire. Does that accord with what you’re hearing on the ground?
CEOs don’t freak out generally — they’ve seen a lot. But they’re definitely perplexed, bordering on unnerved, by what’s going on. They’re still hoping beyond hope that the president will pivot and cooler heads will prevail. That’s the general view, but I think economists are all downgrading their projections. I think everybody that I know of has.

It’s fair to say that a lot of people misjudged him at least somewhat this term, right?
Oh yeah.

People didn’t think it would get to this point, and we’re only at the beginning.
I misjudged — I expected him to go down the path of tariffs and immigrant deportations and the DOGE cuts. He was going to do what he said he was going to do. I just didn’t think he was going to do it to the degree he’s doing it now. The other thing I didn’t appreciate was the administration’s inability to articulate the motivation for this.

They seem to come up with a different one every day.
Yeah. I mean, is it politics? Is it just performative? Is it the trade deficit? Is it trying to get investment and jobs back in the United States? Is it revenue? All of the above? It’s impossible to discern. And as such, it’s impossible to handicap, which goes back to the uncertainty.

I’ve seen people theorize that the administration might be okay with the economy tipping into a recession to get interest rates lower.
Why, because low interest rates are good in and of themselves?

Trump loves low interest rates, and he’ll do anything to get there, is the idea.
I just can’t get my mind around it.The other argument I’ve heard is, and this is from John Carney at Breitbart, is that this is brinkmanship. We’re going to jack up tariffs to such a degree and pound the table so loudly that ultimately, everyone’s going to relent, and tariffs across the board will come down. But good luck with that.

It’s important to distinguish between the stock market and the overall economy, as we’ve learned many times over the last couple of decades. But you’ve said that the market is particularly important right now because of the high-end spenders that are powering the economy. What is the case for paying attention to the Dow Jones every day?
The bulk of the growth in the economy is coming from spending by the well-to-do, people with high incomes and high net worth that own a lot of stock. And they’re focused on their stock portfolios. They’re also older, in their fifties and sixties and in retirement, so when stock prices are up, they feel pretty good, more confident, and they go out and spend more. You can see that in the decline in saving rates among the well-to-do. And again, that’s where the money is, and that’s driving a lot of the growth.

But it also means if the stock market goes down, and they see a lot of red on their screen, they’re going to turn cautious very quickly. They’re not going to stop spending, but they’re not going to continue to draw down their savings. That juice is going to go away, and that’s going to take a bite out of the economy. And once that happens, it puts pressure on businesses who could then start laying off workers, and then you get into this kind of self-reinforcing cycle, into recession. So the stock market plays a central role, a much more central role now than it has historically, because of the current circumstances where the high-end well-to-do are driving the train.

The other, I think, reason to be focused on it is the hope that President Trump is also focused on it. He’s been saying, “No, don’t pay attention.” But I suspect that he still is watching it as a kind of real-time report card on how he’s doing. So if it goes down, one would think that would put pressure to change policy or at least to cool things off a little bit.

What about surveys of consumer sentiment, like the University of Michigan survey? Is that a good gauge of the economy’s overall health?
I think sentiment is, but I would not watch the University of Michigan survey. They’ve had all kinds of measurement problems and it’s biased by some of their questioning and the way they conduct it. I just don’t put any weight on it. It doesn’t conform with the way people are behaving. The best measure is the Conference Board Survey. That’s done a very good job of gauging what’s going on, and it’s very consistent with spending patterns. And it’s down in the last couple of months. Historically, if that falls significantly, like five, 10 points a month for a three, four-month period, game over. Consumers have packed it in, they’re running into the bunker, and they’re going to stop spending. We’re down a couple months like that. So yellow flares are going off in my mind. Another couple months of that, and I think the red flares would start to go off.

Do you lay any of the blame for this current situation on Joe Biden’s policies? Or is this all sort of self-inflicted, this new uncertainty?
This is all self-inflicted. Again, the economy had its issues. There’s always issues. But coming into the year, it was performing exceptionally well. It was far and away the strongest economy on the planet.

The envy of the world.
The envy of the world. So it’s hard — impossible in my mind — to lay any of this at the feet of President Biden.

This interview has been edited for length and clarity.