(Image source from: Twitter.com/WhiteHouse)
Is there a possibility of categorizing recessions as “good” or “bad,” akin to the distinction between good and bad cholesterol? This query arises as global markets contemplate the potential for a recession in the United States, the foremost economy that constitutes a quarter of the global GDP. The interconnectedness of the world’s economies means that any significant shift in the US often has far-reaching effects. Currently, discussions surrounding a potential recession are complicated by geopolitical tensions and economic uncertainties, significantly influenced by President Donald Trump's unconventional approach, diverging from the traditional business cycles typically involved. This situation necessitates a deeper analysis that transcends conventional factors.
Prominent economists from institutions such as Harvard University and the credit agency Moody's estimate a 35% likelihood of a recession occurring in the US, driven by reductions in government expenditures, various instabilities, and the repercussions of tariffs that Trump intends to impose on key trading allies, notably China, Canada, Mexico, and the European Union, with India also being a target. The term “Trumpcession” has emerged in this context, with the president indicating that he refrains from forecasting a downturn yet implies that such a recession might be an acceptable consequence of the significant transformations he aims to implement. He remarked, “There is a period of transition because what we’re doing is very big. We’re bringing wealth back to America… It takes a little time,” during an interview.
In a literary sense, some might liken Trump to a modern-day Don Quixote, engaged in the ambitious endeavor to “Make America Great Again,” with the billionaire entrepreneur Elon Musk playing the role of his loyal companion, reminiscent of Sancho Panza. However, similar to the trials faced by Sancho Panza in Cervantes’ classic tale as a consequence of Don Quixote’s fantastical pursuits, Musk has experienced significant financial losses, with his net worth dropping as much as $29 billion in a single day amid rising recession concerns. The wealth of the world’s richest individual, once at $486 billion last December, has diminished by $132 billion since then. Clearly, Trump is not merely a character from a romanticized 17th-century narrative but a tangible political figure of the 21st century.
While Musk’s endorsement of Trump is well-documented, this moment also offers an opportunity to reflect on the influential tech leaders who attended the presidential inauguration as a sign of respect to authority. Would their positions have been more advantageous had they lent their support to Trump's Democratic opponent, Kamala Harris, during the last election cycle? Since January 17, Musk has seen his fortune decrease by $148 billion, Jeff Bezos has lost $29 billion, Sergei Brin (represented indirectly by CEO Sundar Pichai at the inauguration) has seen a reduction of $22 billion, and Mark Zuckerberg has lost $5 billion. However, these considerations dwell in the realm of hypothetical scenarios. The hard facts indicate that the US economy has been performing relatively well. It was poised for a cut in interest rates, and inflation appeared to be under control prior to Trump’s intervention with his unconventional tariff strategies, taking aim at the principal elements of the global economy.
An unforeseen surge in inflation could emerge from rising import tariffs, resulting in higher expenses for the typical American and diminishing her spending power.
While public finances pose challenges, they may not be as severe as portrayed by Trump supporters. Over the past century, the federal debt in the United States has ballooned considerably, culminating in a debt-to-GDP ratio of 121.9% in the final quarter of 2024. This might raise concerns, yet various indicators imply that the situation is not dire. Excluding years marked by crises, such as the global financial crisis of 2008 and the aftermath of COVID-19 in 2020-21, the federal deficit as a percentage of GDP has been gradually increasing over the last forty years, standing at 6.4% in 2024, albeit in a consistent manner. The three post-World War II decades previously saw minimal deficits for the United States, possibly explaining Trump's yearning for a return to a perceived era of American strength.
In absolute terms, the budget deficit for the United States surged to $1.833 trillion for the 2024 fiscal year, the largest figure recorded outside the COVID period. This increase was driven by interest costs on federal debt exceeding $1 trillion for the first time along with expanded spending on social security, retirement benefits, healthcare, and military initiatives. For the year ending in September, the deficit rose by 8%, totaling an additional $138 billion, marking it as the third-largest federal deficit in the nation’s history. However, this figure may not provide a complete picture, as the overall US economy has grown consistently from approximately $5 trillion in 1990 to around $29 trillion in 2024.
In 1960, the United States accounted for a substantial 40% of global GDP, but this share has steadily declined over the decades, reaching an impressive 24% last year.
Trump aims to revive America's manufacturing sector and boost government revenues through proposed increases in tariffs. Nonetheless, the current unemployment rate of 4% is one of the lowest observed in decades, with services comprising nearly 80% of job offerings. It is challenging to envision a large-scale revival of manufacturing jobs in the U.S. amidst technological advancements, such as the rise of robotics, in a way that benefits the workforce. As such, what remains is a pursuit of MAGA ideals that seeks to reduce the federal deficit and fortify the US dollar, in addition to domestic priorities like addressing illegal immigration and promoting diversity-focused employment.
The crucial question is whether Trump’s proposed economic strategies might worsen the political issues at hand. Much hinges on how international trading partners react to US threats, which currently appear more symbolic than actionable. The trade conflict involvement of the World Trade Organization (WTO) and retaliatory measures from countries like China and India are integral components of the ongoing trade war.
Geopolitical uncertainties, including the ongoing Russia-Ukraine conflict and the situation in Gaza, contribute to an atmosphere filled with unpredictability. It's widely considered that India could remain relatively unscathed in the event of an economic downturn in the United States. However, the notion implied by Trump—that there is a cost for the revival of his nostalgically envisioned American greatness—may pose challenges for the nation.
Despite his history as a former real estate mogul, Trump might still pursue international trade agreements, aiming to demonstrate his effectiveness as a leader. If these efforts are primarily for show, we could witness a significant economic revival. Conversely, Trump's current approach resembles a game of chance, where the US could jeopardize its own financial stability. Much hinges on the level of hardship experienced by the average American, whether through inflation or reduced incomes—or potentially neither. Moreover, it might be worthwhile to examine the perspectives and actions of wealthy individuals who are financially impacted, particularly regarding their views on costly presidential initiatives. This is a critical area to monitor.
