U.S. President Donald Trump is joined by entertainer Kid Rock as he signs an executive order in the Oval Office on March 31, 2025, in Washington, DC.
Andrew Harnik | Getty Images
President Donald Trump is poised to embark on a significant risk during his early second term, betting that widespread tariffs on imports will initiate a new chapter for the U.S. economy.
The situation is critical.
As Trump gears up for his “liberation day” announcement, consumer confidence has plummeted to multi-year lows. Households are anxious that these tariffs may fuel a new wave of painful inflation, while investors worry that increased prices could lead to diminished profits and additional challenges for the troubled stock market.
Trump’s vision is for an economy that doesn’t rely on deficit spending, where countries like Canada, Mexico, China, and Europe no longer exploit the U.S. consumer’s demand for low-cost goods.
The primary issue at this point is that there is little clarity outside the White House regarding how these objectives will be achieved or what the costs will entail.
“People often expect immediate results and want full transparency,” said Joseph LaVorgna, who advised Trump economically during his first term. “Negotiations don’t unfold that way. Important progress takes time.”
Though optimistic that Trump can succeed, LaVorgna, now chief economist at SMBC Nikko Securities, appreciates why market participants are unsettled by the prevailing uncertainty.
“This is a negotiation and should be considered over time,” he stated. “We’ll eventually receive details and more clarity, and it will likely all converge. But right now, it’s just premature to determine how these implementations will appear.”
What we do know is that the White House plans to enforce “reciprocal” tariffs on its trading partners. Essentially, the U.S. will impose tariffs that match those of other countries on American goods. A recent figure mentioned is a blanket tariff of 20%, but LaVorgna suggests it may settle closer to 10%, while potentially reaching 60% for China.
However, the outcome may be more intricate as Trump aims to address a record U.S. trade deficit of $131.4 billion. He boasts about his deal-making skills, and the strong rhetoric about imposing severe tariffs on other nations is part of his strategy to negotiate the most favorable conditions for increased domestic manufacturing, creating jobs, and establishing a more equitable trade environment.
Yet, the immediate fallout could be challenging.
Possible Inflation Effects
At their core, tariffs function as taxes on imports and are typically seen as inflationary. However, real-world outcomes can diverge from this theory.
During his first term, Trump enacted significant tariffs with minimal signs of sustained inflation beyond isolated price spikes. Federal Reserve economists often classify tariffs this way—as transient disturbances rather than persistent inflation drivers.
This situation might differ as Trump attempts something unprecedented since the detrimental Smoot-Hawley tariffs of 1930, which initiated a global trade conflict, representing the direst scenario for Trump’s ambitions.
“This could fundamentally alter the domestic and global economy in a manner akin to Thatcher or Reagan, fostering a more empowered private sector, streamlined government, and fair trade practices,” said Mohamed El-Erian, chief economic advisor at Allianz, during an appearance on CNBC. “Conversely, should we experience retaliatory tariffs, we risk descending into stagflation, which would pose significant problems.”
The U.S. economy is already showing signs of a stagflationary trend, not entirely resembling the 1970s or early ’80s but still indicating reduced growth alongside stubborn inflation.
Goldman Sachs has cut its economic growth forecast for the year to barely above zero, attributing this to “the recent sharp decline in household and business confidence” coupled with the secondary effects of tariffs as officials prioritize long-term trade objectives over short-term growth.
Federal Reserve officials projected a 1.7% growth in gross domestic product this year; Goldman, however, forecasts growth at only about 1%.
Furthermore, Goldman has increased its recession risk estimate to 35% for the year, although it still anticipates some growth in a probable scenario.
Wider Economic Concerns
Meanwhile, Luke Tilley, chief economist at Wilmington Trust, believes the risk of recession may be even higher, at 40%, and this is not only due to tariff effects.
“We have been approaching the pessimistic end of the spectrum,” he stated. “Much of this stems from our belief that consumer strength was insufficient at the year’s start, and we are witnessing growth slow because of the tariffs.”
Tilley also perceives a weakening labor market, as businesses pause on hiring and delay capital investment decisions.
This perspective aligns with findings from a recent Institute for Supply Management survey, where participants noted that the prevailing uncertainty is hindering growth.
“Clients are hesitating on new orders due to uncertainties around tariffs,” commented a manager in the transportation equipment sector. “Without clear guidance from the administration, it’s increasingly difficult to speculate on the implications for our business.”
While Tilley contends that worries regarding tariffs causing enduring inflation are overstated—pointing to the Smoot-Hawley tariffs, which ultimately proved deflationary—he does caution that they represent a danger to an already vulnerable consumer and economy, potentially exacerbating existing economic weaknesses.
“We see tariffs as a considerable burden on growth. They may lead to initial price increases in early inflation reports, but this could create enough economic weakness to render them net deflationary,” he explained. “They function as a tax increase, are contractionary, and will exert pressure on the economy.”
Get Your Ticket to Pro LIVE
Join us at the New York Stock Exchange!
In uncertain markets, gain an edge with CNBC Pro LIVE, an exclusive inaugural event at the historic New York Stock Exchange.
In today’s dynamic financial climate, expert insights are invaluable. As a CNBC Pro subscriber, we invite you to attend our first unique in-person CNBC Pro LIVE event at the iconic NYSE on Thursday, June 12.
Participate in interactive Pro sessions led by our Pros Carter Worth, Dan Niles, and Dan Ives, along with a special edition of Pro Talks featuring Tom Lee. Additionally, you will have the chance to network with CNBC experts, talent, and fellow Pro subscribers during an engaging cocktail hour on the legendary trading floor. Tickets are limited!
On March 31, 2025, U.S. President Donald Trump, accompanied by entertainer Kid Rock, announced plans to implement significant tariffs on imports, marking a bold strategy for his second term aimed at revitalizing the American economy. This initiative comes amidst notable economic uncertainty, with consumer sentiment at low levels and concerns about potential inflation from the tariffs. Investors fear that higher prices for goods could reduce profits and further impact an already strained stock market.
Trump’s approach revolves around establishing a new economic order that does not rely on deficit spending and addresses trade imbalances, specifically the substantial U.S. trade deficit, which reached $131.4 billion. The administration is proposing “reciprocal” tariffs that would match the duties imposed by trading partners, with early indications suggesting a baseline tariff of around 10%—increased to 60% for China and possibly a 20% blanket tariff.
The proposed tariffs are part of a broader strategy to reshape manufacturing and bolster American jobs. However, many details remain unclear, prompting skepticism from both economic experts and the market. Joseph LaVorgna, a former senior economic advisor to Trump, acknowledged the need for patience as the administration engages in complex negotiations, suggesting that clarity and detailed plans would emerge over time.
While tariffs are traditionally seen as inflationary because they raise import costs, the scenario may be more nuanced this time. During Trump’s first term, previous tariffs did not lead to widespread long-term inflation, only isolated price increases. Nonetheless, experts warn that this anticipated round of tariffs, perhaps comparable in impact to the Smoot-Hawley tariffs of 1930, could lead to significant economic upheaval.
Economic commentators express dual concerns about the incoming tariffs potentially triggering stagflation—a combination of stagnant economic growth and rising prices. Specifically, Mohamed El-Erian of Allianz noted that while the tariffs could stimulate private sector growth, they also risk inciting retaliatory trade measures, leading to a period of stagnant economic activity. Goldman Sachs downgraded its growth projections for the year to a barely positive rate of 1%, attributing this to waning confidence among consumers and businesses.
The likelihood of recession, as gauged by Goldman Sachs, now stands at 35%, while Wilmington Trust’s chief economist Luke Tilley suggested a higher estimate of 40%, based on pre-existing vulnerabilities in consumer strength. This downturn is reflected in impediments to business hiring and investment decisions, as indicated by a recent survey from the Institute for Supply Management. The survey highlighted that uncertainty surrounding tariffs is causing businesses to pause new orders, demonstrating a broader hesitancy in the economic climate.
While some economists argue that concerns regarding long-term inflation impacts from tariffs may be overstated, they nonetheless recognize tariffs as a hindrance to economic growth. Tilley articulated that tariffs could act as a counterproductive force in an already fragile economy, suggesting that, while they may initially spike prices, the resulting economic weakness could ultimately lead to a net deflationary effect. He characterized the proposed tariffs as a type of tax increase that would likely suppress economic activity.
Amidst this escalating uncertainty, Trump’s administration is tasked with navigating complex negotiations, balancing tariff imposition against potential economic fallout. As consumers and investors await further details, the long-term implications of these tariffs for the U.S. economy remain a critical area of concern and speculation. The coming days and weeks will be pivotal in determining whether Trump’s high-stakes gamble can yield the desired economic revival or exacerbate existing challenges.
