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Strange Bedfellows
The Trump administration’s back-and-forth on tariffs — along with retaliation from China, Canada and the European Union — started to muddy the economic picture this week, with uncertainty and slow growth prompting questions about a near-term recession.
"Right now, your traditional causes of a recession aren't flashing red, but we just have this suffocating effect of all the uncertainty around trade and fiscal policy and immigration,” Ryan Sweet, chief U.S. economist at Oxford Economics, told CBS on March 12. Economists from Moody’s Analytics and Goldman Sachs Group raised their odds of a recession this week.
As of Friday morning, Chinese imports have been taxed at 20%, up from 10% before the election. A 25% tariff on imports from Canada and Mexico went into effect on March 4, though the administration announced it would delay some tariffs until April 2. The administration pulled back on doubling the 25% tax on steel and aluminum imports that took effect on March 12.
Last week, the Federal Reserve Bank of Atlanta’s economic models estimated real growth in gross domestic product at -2.4% for the first quarter, with exports expected to decline amid President Trump’s trade war. That’s a flip from a few weeks ago, when the Atlanta Fed expected real GDP to grow 2.3%.
Complicating the forecast is inflation, which cooled in February to 2.8% but remained above the Fed’s 2% target. It’s possible the economy could face a malady not seen since the 1970s: stagflation, which occurs when inflation combines with low growth.
“Stagflation presents a central bank with an unpleasant policy dilemma,” wrote former Fed vice chairman Alan Blinder in “A Monetary and Fiscal History of the United States, 1961–2021.” The Fed’s responsibilities to maximize employment and price stability oppose one another in a stagflationary environment. Does the Fed tighten to tackle inflation or ease to promote growth?
A slow economy and inflation are “strange bedfellows” — and a likely tail risk, says Van Hesser, senior managing director and chief strategist at KBRA. But an economic downturn looks probable.
“As we look out over the next 12 months, this environment is not as favorable as it has been for much of the last several years,” he says. He advises banks to review their loan and bond portfolios. “Think about what this new normal is going to look like.”
• Emily McCormick, vice president of editorial & research for Bank Director
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