The author is the director of economic policy research at the American Enterprise Institute
If the U.S. president wants to put the U.S. economy into recession, raising tariffs to levels not seen in more than a century and imposing a de facto embargo in China would be a good strategy.
The engineering recession is not the goal of Donald Trump when he launched a trade war this spring, but investors are less interested in his motivation than the impact of his policies and the chaotic atmosphere he created. Equity value and dollar decline, bond yields rise - economists underwent a recession.
But Trump’s shocking decision on Monday was to lower tariffs on Chinese imports by 115 percentage points, which caused markets to soar and led economists to extend their odds during a downturn. That's right. This year's recession is unlikely. Trump seems eager to cancel the conflict with China, believing he doesn't want to "hurt" them and complimenting his "very very, very good" relationship with Beijing. Treasury Secretary Scott Bessent is even stronger, saying: "Both sides want to decouple."
Trump also seems to hope to downgrade his trade war more generally. National Economic Commission Director Kevin Hassett said on Friday that there were two dozen trade deals “closely resolved” and he believes it would be “very suitable for the market.” On Thursday, Trump was talking with India about a potential trade deal.
Another reason for a more optimistic economic outlook is that in the past few weeks, Trump has revealed that Trump is willing to shift when the market puts enough pressure on it. After an unfavorable market reaction, he placed his "liberation day" on the ice. Despite continuing to be angry with Fed Chairman Jay Powell, he has now made it clear that he has no intention of firing him.
Like the pressures of the market, Trump’s number of bad polls will eventually lead him to the hub. According to a YouGov poll, a president who is primarily trying to address high prices, his overall net approval rate (in the water that cuts 10%) now outperforms his rating for trade (15% off) and inflation (26% off).
Since taking office in January, Trump has raised the average effective tariff rate in the United States six times even if this week's dial is allowed. As consumer prices rise, he will become more popular, including Republicans. As this cycle develops, growing anxiety about midterm elections means that members of his party will have more courage to oppose his tariffs.
Additionally, the trade war has taken up much of the political oxygen in Washington, risking his efforts to expand its 2017 tax cuts. Trump seems certainly going to lower tariffs, and then he will allow Republican electoral domination and massive tax increases next year.
Another reason for the more optimistic outlook is the resilience of the U.S. economy over the past two months. Last month, employers increased their net salary and employment costs increased compared to January or February this year, and the unemployment rate has not increased.
The monthly salary survey was conducted during the salary period, including April 12, which gave us a window into the labor market performance in the first half of the month. This is ahead of most of the trade war damage that could occur, but for the weeks ending April 26, May 3 or May 10, there is no meaningful increase in new claims.
Meanwhile, the title decline in GDP growth in the first quarter was deceptive. Last quarter, U.S. Department of Commerce data showed that real consumer spending increased by 1.8% from the end of 2024. Commercial fixed investment reversed its fourth-quarter decline, adding 1.3 percentage points to first-quarter growth. Real GDP grew 2% compared to the first quarter of 2024.
To be clear, Monday’s downgrade is not worthy of standing out on Champagne. The economy hasn't exceeded the woods - the average effective tariff rate in the United States has remained high since the Smoot-Hawley era of the 1930s.
Fewer container ships at U.S. ports suggest that at least some of the shelves will be empty and may be layoffs for transport and warehouse workers. Tariffs will raise consumer prices, reduce real income, and lead to reduced consumer spending. US manufacturers import parts and equipment, so tariffs will reduce their competitiveness and reduce demand for workers. The huge uncertainty of Trump's turbulent trade policy will cause business investment and expansion.
And my optimism may be misplaced. On the issue in tough economic data, businesses may start raising workers and freezing spending. Small businesses cannot survive the significant increase in import costs for several months. Given the worrying increase in medium-term inflation expectations, the Fed may not be able to reduce the hit rate of lower revenue and demand.
Still, Trump’s desire to cancel escalation, willingness to move, and economic resilience suggests that the U.S. can avoid the worst. That doesn't mean it will achieve the best results. Trump's trade war remains a surprising act of self-sabotage, which will slow growth and increase unemployment. Avoiding recession is an injustice and tragic indicator of success.