Is Trumponomics leading US into a recession?
Our prediction is coming true!
See, Trump wants to impose tariffs on everyone and everything. We wrote about it in November 2024, and we said that his grand idea would end up hurting the US itself. Now, it looks like that’s exactly what’s happening.
So today, we’re going to break this down and talk about 3 things that’s on everyone’s mind:
But before we dive in, just in case you’re wondering what these ‘tariffs’ are, simply think of it as a tax that domestic firms have to pay if they’re importing a foreign product into the US. For instance, if a firm imports a washing machine from abroad, they have to pay a percentage of the sticker price as tax to the government. So the imported washing machine gets more expensive.
And countries typically impose such tariffs in the hope that it will stop expensive imports and boost local manufacturing and employment.
Now that we’ve got that bit clear, let’s break today’s story down into 3 bits.
The R-word rears its head in America
The textbook definition of a recession is that if economic growth slows down for a few months, it’s a recession. Now that sounds quite vague, so people have come up with a thumb rule which says that it’s a recession if the GDP growth rate is negative for two consecutive quarters.
So is the US there yet?
Nope. Not yet.
But, the future isn’t looking that bright.
See, GDP is primarily driven by 3 key things?—?consumer spending, business spending, and government spending.
And if you look at consumers in the US, who drive 70% of the country’s GDP, you’ll see them cutting back on spending. They reduced spending by 0.2% in January. And while that might not seem like much, it was the sharpest decline in 4 years!
So that should tell us that they’re worried about something.
Also, if you want to know if people are really feeling the pinch, just track whether loans are being repaid on time. Credit card delinquencies?—?when it’s 90 days overdue?—?is at its highest level in 13 years. And overdue car loans are also at a 4-year high too.
So consumers are definitely in a bind.
Then there’s the businesses. These folks are so confused about Trump’s erratic policies that they’d rather wait and watch before making any moves. A Capex Intentions Indicator by BCA Research which signals if companies are planning to invest their money into growing capacity has fallen into contractionary territory.
And you can’t blame businesses for thinking that way because sales, new orders, exports?—?everything has fallen across manufacturing and service sectors.
The signs are not good, so they’re hitting pause with their money.
But the bigger worry is that the US is headed straight into a situation known as stagflation.
What’s that, you ask?
Okay, so in a typical form of recession, people stop consuming stuff and this not only hampers economic growth, but the lack of demand leads to lower prices.
And governments and central banks know how to fix this?—?they throw money at the problem by spending on infrastructure and other things or they cut interest rates to spur borrowing.
But in the case of stagflation, you get something quite paradoxical.
You get an economic slowdown but you also see prices rising. Weird, we know. And this situation can occur due to external factors?—?such as Trump’s tariffs.
You see, we told you earlier that tariffs could make it more expensive to import stuff into the US. And some estimates suggest that because of this, American households will have to increase their budgets by $3,000 to live the same lifestyle.
And the thing is, solving the stagflation problem is tough. If prices of goods are already rising and the government throws money at the problem, it could push demand and cause prices to rise even further.
If ever there was a wicked problem for policymakers, it’s this. And the US might be hurtling towards it.
American Exceptionalism is under the scanner
You may not have heard this phrase ‘American exceptionalism’ before, but it has been all the rage in the past few years. It’s a sort of chest-thumping affirmatory phrase that Americans have turned to in order to say that they’re better than the rest of the world?—?that their economy is stronger and more resilient, that their stock market is the only place to bet on, and of course, it’s a nod to the fact that the biggest ‘tech’ companies in the world such as Nvidia, Apple, and Microsoft are born on American soil.
Investors have bought into this notion of American exceptionalism too. They’ve pumped money into American stocks driven by the superior profits that its companies have been making. And America has rewarded them handsomely?—?in the past 10 years, the S&P 500 has outperformed the MSCI Europe index by an average yearly rate of 8% and it has beaten the MSCI Emerging Markets by around 10% yearly.
So you can see why everyone wanted a piece of American Exceptionalism.
But guess what…the Exceptionalism trade seems to be faltering. And that’s partly thanks to Trump’s policies.
See, investors are used to market gyrations. They’re used to uncertainty. But when they have to wake up each day worried about erratic political policies coming from the desk of one man, they’ll tend to reverse course.
Especially if those policies come with the risk of driving the economy into a recession. One that will quite literally kill these ‘exceptional’ profits that American companies have delivered in the past decade.
And you can see the momentum shift already in 2025.
Stock market analysts are already publishing long notes titled ‘U.S. exceptionalism is fading,’ and highlighting that the exceptionalism theme is ‘in tatters.’
And the stock market performance is there for everyone to witness. The MSCI Europe tracker is up by 12% thus far, while the US S&P 500 has cracked by over 6%. The folks at Citi have even asked investors to ditch the US and look at China instead.
It’s all happening.
Now there’s no guarantee that other markets will continue their outperformance, but reviving animal spirits could well be an uphill battle this year for America.
A cold war with a twist
Okay, calling it a ‘cold war’ is a bit farfetched, but hear us out.
If you paid some attention to your history class in school, you’ll remember that the Cold War began after World War II. But it wasn’t really a war fought with weapons. Rather, it was an economic and political battle between two competing superpowers?—?the US and Russia. Both trying to establish their dominance in the world.
Now one key alliance that emerged during this period was the US teaming up with Europe (that’s how NATO was born) to try and dissuade Russia from making political inroads into the continent.
So you could say that the Euro-American transatlantic alliance began over 80 years earlier!
But under Trump, that’s starting to buckle.
The US is distancing itself from Europe. Trump’s administration is slapping tariffs on its oldest allies without a second thought. And instead, it’s warming up to its old foe Russia now.
That’s making Europe wary. They’re not sure if they can trust their old friend anymore.
And if you see what the soon-to-be Chancellor of Germany said last week, you’ll realise what we meant by the restart of the cold war:
“My absolute priority will be to strengthen Europe as quickly as possible so that, step by step, we can really achieve independence from the USA.”
Read that bit again –’independence from the US’.
That’s a strong statement, huh?
And what he’s referring to are two things.
Firstly, it’s about how reliant Europe is on the US for its defence needs. Between 2019 and 2023, 55% of Europe’s defence equipment imports came from the US. So Europe is quite reliant on America for their needs. So, Europe wants to change that. They’re set to go on a defence spending spree that hasn’t been seen since the cold war.
Secondly, there’s also the dependence on American tech?—?whether it is for cloud services to store data, microchips, or even AI. If relations between the two allies sour, it leaves the destiny of Europe in the hands of America. So the European Commissions has established its first-ever ‘technology sovereignty’ chief to build Europe’s own digital stack.
And they’re ready to throw all their past fiscal prudence out of the window and borrow copious amounts of money to achieve their goals.
The end result?
… investors now see a fundamental shift in Europe that will affect portfolio allocations for years to come.
Trump’s policy could in fact, ‘Make Europe Great Again’*. And that may not be the best thing for American businesses.
So yeah, it looks like Trumponomics is hurting the US. And everyone’s waking up to the bad news.
*European countries could end up falling into a recession too because of Trump's tariffs – that's what Germany is currently worried about. Even so, portfolio managers seem to have begun rotation of capital into opportunities in Europe due to more attractive valuations.