The Potential Economic Effects of Trump’s Tariff Reversals

The past few weeks have been marked by significant upheaval regarding trade tariffs, government employment, and the potential threat of a government shutdown. The financial markets have reacted strongly, with the Dow Jones Industrial Average experiencing a 2% decline and the Nasdaq dropping 4%, essentially wiping out the gains made since President Trump’s inauguration.

Economists typically assess potential recessions by examining factors such as economic growth, unemployment rates, and inflation. However, consumer confidence and business sentiment are equally vital components of the economic landscape. Since President Trump’s second term began, there has been a multitude of policy changes that have contributed to rising uncertainty among economists.

Gerald Cohen, chief economist at the Kenan Institute of Private Enterprise at the University of North Carolina, emphasizes that uncertainty regarding policy impacts critical business decisions. According to him, when uncertainty is present, companies are less likely to make significant and necessary investment decisions, which could ultimately lead to a recession.

The Economic Policy Uncertainty Index serves as an important tool in assessing this climate of uncertainty. Originating from an analysis involving news articles, tax data, and input from the Federal Reserve Bank of Philadelphia, this index has recently reached its highest levels since the COVID-19 pandemic. Scott Baker, one of the co-creators of this index, notes that both political uncertainty and negative economic growth are interlinked, with current trends reflecting a dramatic increase in political unpredictability.

Similarly, consumer sentiment is on the decline, as noted by the University of Michigan’s consumer sentiment index, which has dropped nearly 16% compared to the previous year. Joanne Hsu, the director of the university’s Surveys of Consumers, points out a growing pessimistic attitude among consumers over the past two months.

Small business sentiment is also shaky. According to the National Federation of Independent Business (NFIB), their small business optimism index fell by 2.1 points to 100.7 in February, which is still above the historical average. Their uncertainty index also rose significantly, showing that business owners are increasingly apprehensive about the economic future.

Emily Gee, a senior vice president at the Center for American Progress, believes the erratic policy decisions made by the Trump administration contribute to an elevated level of uncertainty. She argues that this scenario is detrimental not only to public agencies but also negatively affects private sector employees and businesses.

Despite these concerns, President Trump has played down fears of an impending recession, which is technically defined as two consecutive quarters of negative economic growth. While the U.S. real GDP grew at an annual rate of 2.3% in the fourth quarter of 2024, forecasts for the first quarter of 2025 indicate a troubling -2.4%. When confronted with questions regarding these economic forecasts, Trump has often evaded direct answers, expressing reluctance to make predictions about the economy.

Recently, Kevin Hassett, the director of the National Economic Council, defended the tariff policies of the White House, asserting that reducing inflation through cutting federal spending would have a more substantial impact than minor changes in tariffs.

Nick Iacovella from the Coalition for a Prosperous America provided insight into businesses’ desires for stable trade policies that foster industrial growth. He mentioned that employers want assurances from the president that the administration will uphold broad tariffs and follow through on its trade agenda.

Ultimately, the public’s purchasing decisions will serve as a substantial indicator of the efficacy of these policies. With consumer spending accounting for roughly 70% of GDP, a significant drop in consumer confidence could complicate economic recovery.

Despite the prevailing uncertainty, there is potential for consumers to bounce back and maintain a level of resilience, as pointed out by Baker. This enduring consumer confidence could play a crucial role in navigating through these turbulent times.