Tariffs Trigger Recession Fears, Economists Warn

Many economists predict that President Trump's decision to impose tariffs on Canada and Mexico will ultimately lead to a U.S. recession.

Simulations have been done on the full tariffs against China, Canada, and Mexico, and if you believe them, we'll be in recession in nine to 12 months, said Carl Tannenbaum, chief economist at northern trust, in an interview.

Greg Daco, chief economist at financial and accounting advisory firm EY, agreed. You can't underplay the potential drag on economic damage. This is a recession for North America, he said.

Brian Bethune, an economics professor at Boston College, noted that the U.S. economy has not faced such a significant shock since the Smoot-Hawley tariffs were enacted in 1930.

Economists believe those tariffs worsened the Great Depression by prompting other countries to impose their own trade barriers, leading to a sharp decline in global economic activity.

Ask Aime: What will be the impact of President Trump's tariff decisions on the U.S. economy and the global market?

Bethune warned that tariffs would disrupt supply chains and put U.S. manufacturers with global operations in a highly challenging position. Faced with uncertainty, businesses would first freeze hiring and eventually be forced to restructure global production networks—a process that could take a long time. Furthermore, slower hiring would reduce consumer spending, which is the primary driver of economic growth.

Due to the pandemic, companies were already forced to reassess their operations, leading to efficiency improvements such as strengthening overseas supply chains. Labor supply also increased, including from foreign workers. These factors provided the U.S. economy with growth momentum not seen in other regions.

The immediate effect of the new tariffs will be to suppress growth while driving up inflation, creating what economists call stagflation. This phenomenon, last seen in the U.S. economy during the 1970s and 1980s, is characterized by economic stagnation coupled with persistently high inflation.

Bethune believes the Federal Reserve should consider cutting interest rates to counteract this scenario.