During his election campaign last year, Donald Trump assured Americans that he would bring in a new wave of economic prosperity. However, two months into his presidency, his messaging has shifted. He has now warned that lowering prices will be challenging and has advised the public to brace for a “little disturbance” before he can restore wealth to the U.S. economy.
Despite recent data indicating that inflation is cooling, analysts suggest that the likelihood of an economic downturn is rising, with many pointing to his policies as a contributing factor. This raises the question: Is Trump steering the world’s largest economy toward a recession?
Markets React as Recession Risks Escalate
In the U.S., a recession is defined as a prolonged and widespread decline in economic activity, often accompanied by rising unemployment and falling incomes. Recently, several economic analysts have sounded the alarm that the risks of such a scenario are mounting.
A report from JP Morgan has raised the probability of a recession to 40%, up from 30% at the beginning of the year, cautioning that U.S. policies are now “tilting away from growth.” Similarly, Mark Zandi, chief economist at Moody’s Analytics, has increased his estimate of recession odds from 15% to 35%, citing the impact of tariffs.
These warnings have coincided with a significant decline in the S&P 500, which tracks 500 of the largest U.S. companies. The index has now dropped to its lowest point since September, signaling growing fears about the economic future.
Market instability has been partially fueled by concerns over new import taxes, known as tariffs, that Trump has imposed since taking office. His administration has targeted imports from America’s three largest trading partners with these tariffs and has threatened to expand them further. Analysts believe these actions will drive up prices and slow economic growth.
Meanwhile, official data from the U.S. Labor Department shows that inflation eased slightly in February, with prices rising 2.8% over the past year compared to 3% in January. Despite this, Trump and his economic advisors continue to caution the public to expect economic challenges. This marks a stark departure from his first term, when he frequently touted the stock market as a measure of his success.
“There will always be changes and adjustments,” Trump said last week in response to business leaders calling for more economic stability.
His stance has intensified investor concerns regarding his economic strategy. Goldman Sachs recently raised its own recession risk estimate from 15% to 20%, identifying policy changes as the primary threat to economic stability. However, the investment firm also noted that the White House could still “pull back if the downside risks begin to look more serious.”
“If the White House remained committed to its policies even in the face of much worse data, recession risk would rise further,” analysts at Goldman Sachs warned.
Impact of Tariffs, Uncertainty, and Economic Slowdown
For many businesses, the greatest uncertainty stems from Trump’s tariffs, which have increased costs for American companies by imposing taxes on imports. As the administration continues to roll out its tariff plans, many firms are seeing their profit margins shrink. In response, some companies are holding back on new investments and hiring as they try to navigate an unpredictable future.
Investors are also worried about deep cuts to the government workforce and federal spending reductions.
Brian Gardner, chief of Washington policy strategy at the investment bank Stifel, explained that businesses and investors initially assumed Trump was using tariffs as a bargaining tool.
“But what the president and his cabinet are signaling is actually a bigger deal. It’s a restructuring of the American economy,” he said. “And that’s what’s been driving markets in the last couple of weeks.”
Even before these developments, the U.S. economy was experiencing a slowdown, partly due to actions taken by the Federal Reserve, which has kept interest rates elevated to cool economic activity and stabilize prices.
Recently, some economic data has pointed to a more pronounced weakening. Retail sales declined in February, and consumer and business confidence—which had surged following Trump’s election—has since fallen. Major corporations, including airlines, retailers like Walmart and Target, and manufacturers, have all issued warnings about reduced spending.
Some analysts fear that a continued decline in the stock market could lead to even tighter consumer spending, particularly among wealthier households. Since the U.S. economy is heavily dependent on consumer spending, and higher-income households play an increasingly significant role, such a shift could have major repercussions—especially as lower-income families continue to struggle with inflation.
Federal Reserve Chair Jerome Powell attempted to reassure the public in a speech last week, arguing that economic sentiment has not always been a reliable indicator of actual behavior.
“Despite elevated levels of uncertainty, the U.S. economy continues to be in a good place,” Powell stated.
However, the U.S. economy is deeply interconnected with global markets, a reality that adds another layer of complexity to the situation. Kathleen Brooks, research director at XTB, pointed out that these tariffs could create significant disruptions at a time when signs of economic weakness are already emerging.
“The fact that tariffs could disrupt that at the same time that there were signs that the U.S. economy was weakening anyway … is really fueling recession fears,” she said.
Tech Stock Market Correction and AI Bubble Concerns
Not all of the turmoil in the stock market can be attributed to Trump’s policies. Investors were already on edge about the possibility of a market correction, particularly after the substantial gains recorded over the last two years. Much of this growth has been fueled by enthusiasm surrounding artificial intelligence (AI) and the tech sector.
For instance, chipmaker Nvidia saw its share price skyrocket from under $15 at the start of 2023 to nearly $150 by November of last year. Such dramatic increases have sparked debate over whether an “AI bubble” has formed. Many investors are now closely watching for signs that the bubble may burst, which could have significant consequences for the broader market—regardless of what’s happening in the wider economy.
As concerns about the U.S. economy intensify, sustaining the optimism surrounding AI has become even more challenging.
Tech analyst Gene Munster of Deepwater Asset Management expressed his growing doubts on social media this week, admitting that his confidence had “taken a step back” due to the rising likelihood of a recession.
“The bottom line is that if we enter a recession, it will be extremely difficult for the AI trade to continue,” he said.
With the combination of Trump’s economic policies, stock market volatility, and uncertainty in the tech sector, investors and analysts remain on high alert. Whether the administration chooses to adjust its approach in response to mounting risks could determine whether the U.S. economy avoids a full-blown recession or slides into one in the months ahead.