A week has passed since Liberation Day on April 2. The world was rocked by super high, broad-based tariffs announced by President Trump far in excess of what anyone expected.

The markets reacted violently, both up and down, in the following days with the S&P 500 ultimately down about 5% as of the time of writing.

People did not get the certainty they were looking for from the tariff reveal. The initial announcement was followed by a confusing series of pauses, ambiguous details, exemptions, and tit-for-tat increases.

Aside from the escalating trade war with China, Trump has started walking back tariffs after the markets, especially the bond market, largely rebuked the policy.

A few months ago "American Exceptionalism" was the dominant narrative. This has been replaced with discussions of recession probabilities.

But how likely is a recession, actually? How will this episode affect employment and prices? How have businesses been affected and where do we see it going?

In this article, we'll attempt to form a point of view around key economic topics in the midst of all this uncertainty.

Tariffs

First, let's establish a common understanding of tariffs. The dust has yet to settle on tariffs, but the picture is developing. We know tariffs will stick at some level but that level will likely be overall lower than the rates unveiled on the famous Liberation Day posterboard.

For this article, I will make the following assumptions. The 10% baseline tariffs will stay as an average for most countries globally. The Chinese tariff rate will be negotiated down from its current 145% but will be higher than other countries at around the 25% level.

Reciprocal tariffs will be largely negotiated away via deals made with other countries involving buying U.S. goods (similar to the China Phase One agreement), sharing the military burden, and other concessions. Given all this, we'll assume an increase in the tariff rate of 15%.

Deals are likely since the U.S. is the only large country with very large deficits. Other countries lack alternative markets of a comparable size, meaning they cannot easily replace U.S. demand without experiencing a drop in revenue. The U.S. holds significant buying power with the ability to influence prices. The U.S. is the world's biggest customer.

Trump is not just interested in zero tariff rates, he is gunning for zero trade deficits.
While the trade balance should improve after this plays out, eliminating the trade deficit fully is not realistic. Most countries are poorer than America with weaker currencies. Furthermore, aside from agriculture products, it's unclear what some would even buy from America as it manufacturers fewer goods.

Treasury Secretary Scott Bessent said the government is estimating $300-600 billion in tariff revenue per year. This is huge - in the range of the total tax revenue received from all corporations which was $489 billion. Although after the first year or two that revenue should decrease as the U.S. imports decrease.

Growth

Tariffs will slow growth. Goldman Sachs estimates a 1.5% decrease in growth for every 15% increase in the average tariff rate. With a current GDP growth of 2% (which seemed to be already slowing), I expect U.S. GDP growth to be flat plus or minus 1%. This is far less than the goal of 3% GDP growth that Secretary Bessent is shooting for in the long term.

This will result in a shallow recession or at least a very slow growth environment. Part of the drag on growth will be slower business activity based on uncertainty and turmoil. It's hard to quantify but many deals, investments, IPOs, etc., have been delayed or shelved due to the tariff policy. This depresses growth.

Furthermore, if interest rates stay high (in order to keep inflation in check) and other credit  tightens, business growth will be slowed by less available funding.

On the pro-growth side, more tax cuts are expected to be passed partially funded by the tariff revenue. Also, more deregulation and cheaper energy are also on the roadmap for the Trump administration to spur growth.

Will there Be a Recession?

A lot of forecasters have recently increased the risk of recession due to tariffs increasing prices and slowing growth. Goldman Sachs estimates the U.S. has a 45% chance of recession. Larry Fink, the CEO of BlackRock says we are probably already in a recession. The betting market Polymarket has the chance of recession at 51% as of writing (down from about 66% before the first pause was announced).

With the international global economy so interconnected, no country is spared. Goldman Sachs has lowered growth forecasts for almost every country.

All this said, the U.S. economy has proved to be resilient and many recent calls for recessions did not come to fruition.

The other X-factor is this can be unwound by one person (or by Congress), although we don't expect either. This is not a systemic issue deep in the financial plumbing that is very complex to identify and resolve (like the Global Financial Crisis).

Economist Paul Krugman doesn't see a tariff-induced recession: "While tariffs are bad, they don't cause recessions. [They cause] a reduction in economic efficiency not a shortfall in demand."

Others theorize that a recession is deliberately being brought on to crash the market in order to lower interest rates. The thinking is the lower interest rates would save the U.S. hundreds of billions in interest when it needs to roll over trillions of debt in the next year. We don't believe a recession is being deliberately triggered, although lower interest rates are definitely important to the administration.

We can't talk recession without talking about the consumer, who can make or break a recession.

Consumer Sentiment

Consumer sentiment survey data has turned very negative recently. According to a University of Michigan survey, people are expecting higher unemployment and inflation at levels not seen in decades. That said, survey data has not always matched hard economic data ultimately.

For now, unemployment is low and consumers' balance sheets are in decent shape when looking at assets and debt. However, most people's net worth is down in the last month with stocks and bonds dropping. This is a significant factor to net worth as 60% of households own stocks.

Main Street intersects with Wall Street, and if there is a fire on Wall Street some houses on Main Street burn down.

Companies in the Private Sector

Q1 corporate earnings have generally held up so far, yet this is less important now since it's measuring pre-tariff times. This at least shows there was not already significant economic damage going into the tariff period.

But, for all the reasons mentioned above, including tightening financial conditions and uncertainty, the road ahead looks difficult. UBS is now predicting earnings growth of 0% to very low earnings growth, down from double digit expectations at the beginning of the year.

Small businesses are more vulnerable in a downturn. According to a report on small business optimism, the percentage of owners expecting better business conditions decreased 16 points in March for the third consecutive monthly decline and the largest drop since December 2020.

Jobs and Unemployment

The jobs situation is currently strong with job growth higher than expected in Q1. This also is pre-tariff data, so it has to be discounted.

In February 2024, The Labor Department said employers added 275,000 jobs, well above the 198,000 expected. Unemployment increased slightly to 3.9%.

It's likely that most businesses are slowing if not freezing hiring due to uncertainty and anticipation of higher prices.

Due to DOGE, there are significantly fewer federal employees which will also contribute to overall unemployment.

Another factor is lower immigration, which will drive down the supply of workers and therefore should improve employment and wages for Americans, all else equal.

Prices and Inflation

Tariffs are inflationary. They cause a negative supply shock as fewer available goods drives up prices. Even though imports are only 14% of U.S. GDP, price increases from tariffs will be noticeable.

A 15% tariff rate would equate to approximately 1.5% price increases according to Goldman Sachs. However, a one-time price increase is not necessarily inflationary.

The Fed's inflation target is 2% and it has recently been around 2.5%. However, Goldman Sachs is forecasting that the core PCE inflation (which excludes food and energy) will significantly increase to 3.5%.

Interest Rates

There are various conflicting views on how much the Fed will or will not cut interest rates this year.

Any inflation would make it harder for the Fed to lower interest rates, a key tool in boosting growth. Higher unemployment PLUS higher inflation could lead to stagflation, which puts the Fed in a very tough position.

On the other hand, if major employment or growth problems arise and inflation is very high, the Fed may decide to cut.

Goldman Sachs estimates a 75 basis point reduction spread out over 3 cuts in June, July, and September with the caveat that a 200 basis point reduction could occur in a recessionary environment.

What about Treasury yields? These are not directly set by the Fed but are determined by the market. The 10, 20, and 30 year Treasury Yields have all risen sharply since Liberation Day even reaching levels above 4.5%. Every basis point increase translates into significantly higher interest payments for the U.S. Also, a higher rate is often a sign of economic trouble and is the basis for mortgages and business investments, so this is a very important number to watch.

Currency

Despite the administration having a goal of maintaining a strong dollar, the U.S. dollar has dropped since Liberation Day due to people fleeing USD and dollar-denominated assets. If uncertainty in the U.S. economy is rising while perceived strength and trust is decreasing, the capital flight could continue.

This is a trend to closely watch. It could be due to a few institutions or global investors generally feel that a slight rebalancing is justified in their portfolio due to overexposure.

The silver lining of a weaker dollar is that it boosts exports by making American-made goods less expensive to foreigners.

Sources:

https://www.nfib.com/wp-content/uploads/2025/04/NFIB-SBET-Report-March-2025.pdf
https://ustr.gov/phase-one
https://home.treasury.gov/news/press-releases/sb0073
https://www.goldmansachs.com/pdfs/insights/goldman-sachs-research/the-impact-of-uncertainty-on-investment-hiring-and-consumer-spending/report.pdf
https://fred.stlouisfed.org/series/FCTAX
https://www.reuters.com/markets/us/goldman-sachs-raises-odds-us-recession-45-2025-04-07/
https://polymarket.com/event/us-recession-in-2025
https://www.nytimes.com/2024/03/08/business/economy/jobs-report-february-2024.html
https://www.statista.com/statistics/259096/us-imports-as-a-percentage-of-gdp/
https://www.cnbc.com/2025/03/30/tariffs-to-spike-inflation-stunt-growth-and-raise-recession-risks-goldman-says-.html
https://bidenwhitehouse.archives.gov/briefing-room/statements-releases/2024/09/11/statement-from-national-economic-advisor-lael-brainard-on-the-august-consumer-price-index/
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