Patrick Watson of Mauldin Economics says talk of a US recession is now everywhere having seemed unlikely three months ago

By Patrick Watson*

Just three months ago, a US recession seemed unlikely. The economy was humming along by most measures and Federal Reserve officials had even paused their rate cutting, convinced inflation was a bigger threat.

Now recession talk is everywhere. We know why, too. President Trump imposed tariffs far more quickly and aggressively than most people expected. Meanwhile, DOGE czar Elon Musk is busily slashing federal programs he considers wasteful.

Without debating whether those are good ideas, let’s look at their economic effects. The first has been to generate fear.

• The prospect of a global trade war makes investors and business owners afraid costs will rise while profits shrink.

• Millions of federal workers and contractors who haven’t already lost their jobs fear they will soon.

Both groups respond the same way: By postponing spending plans until they have more confidence in the future.

Such “demand shocks” always cause problems. This one is already showing itself in consumer confidence, corporate earnings, and stock prices. That doesn’t necessarily mean recession, but it could. We don’t know yet.

One optimistic factor: the demographic situation. The growing imbalance between working-age people and retirees means there’s not much slack in the labor supply. The latest data shows the economy still has more job openings than unemployed workers who could potentially fill them.

Following big COVID-driven swings, the ratio seems to be stabilizing near the 1.1 to 1.2 range where it was in 2019. This could change if labor demand drops, which is likely if DOGE keeps cutting and consumer spending keeps weakening. It will drop even more if unemployment rises. But barring another pandemic-level event, the labor market should stay historically tight.

Resigning by Proxy

Low unemployment, if it persists, will disappoint some CEOs who want to delete pesky humans who demand things like “breaks” and “vacations.” Google co-founder Sergey Brin recently longed for a return to 60-hour work weeks, which he sees as the productivity “sweet spot.”

Brin might get his wish if AI systems prove as useful as tech enthusiasts expect. But for the moment, demand for human workers still exceeds the available supply.

In Japan, which is a few years ahead on the demographic curve, young workers are hiring “resignation agencies” (taishoku daikou) to inform their bosses the terms of employment are no longer acceptable.

hat’s quite a change for a culture famously devoted to hard work, but it’s really just supply and demand. The supply of any scarce good, including labor, eventually flows to wherever it gets the best terms.

US employers who were quick to shed workers in 2020 have tried to avoid mass layoffs. They learned the costs of finding, hiring, and training new workers during a labor shortage can quickly exceed the “savings” of firing people in a recession. Now the sensible ones find other ways to reduce payroll costs.

If that’s how businesses respond to the DOGE/tariff shock, it may not reach the point of “recession.” Workers may have less spending power, companies may see their earnings drop, but it won’t be as bad as 2008 or 2020.

There are more negative scenarios, though.

Inflation hasn’t gone away, and the trade war could make it worse. Combine that with lower growth and we could be looking at 1970s-style “stagflation.”

Ask anyone who lived through that era; they’ll tell you how miserable it was.

No Checks

The bigger risk is that no one can be sure where government policy is going.

As I wrote before the election, presidents have tremendous power to impose tariffs. Trump is using every bit of that power in unpredictable ways. Maybe he has some grand plan that will make the chaos worthwhile. But if so, it’s not apparent to anyone else.

The authority Trump has given Elon Musk to slash federal spending is equally sweeping. And again, we don’t know how he will use it.

Moreover, there are no checks on this power.

In the first Trump term, more conventional Republicans like Mike Pence, Paul Ryan, Mitch McConnell, and others had a moderating influence. Those guardrails are all gone now.

This time around, the Republican majorities in Congress are giving Trump everything he wants. Courts, financial markets, and public opinion aren’t slowing him down, either. Democratic opposition has been hapless at best.

So as a practical matter, Trump will do whatever Trump wants, and none of us know what that is. Trump himself may not know. He seems to change his mind a lot.

Given the wide range of choices Trump could make, the prudent response is to delay big decisions and wait for more “clarity.” Jerome Powell says that’s what the Fed is doing.

Unfortunately, Trump doesn’t do clarity. He likes to keep everyone guessing.

Trump’s method served him well in the business world. Maybe he’ll make it work for his second presidency, too.

Or maybe not. Meanwhile, the waiting has costs.

*Patrick Watson is senior economic analyst at Mauldin Economics. This article is from a Mauldin Economics series called Connecting the Dots.  It first appeared here, and is used by interest.co.nz with permission.