Market Lab Report - Will the tariffs and DOGE cause a recession?

by Dr. Chris Kacher

Inflation rate cooling

The inflation rate fell below estimates for the first time on both headline and core CPI on both MoM and YoY basis marking the first such decline its rate since July 2024. This gives the Fed room to lower rates which will spur global liquidity.

Tariffs on-again off-again

But in a recent interview, Trump didn’t rule out a recession as he doubled down on his tariff strategy. Much of the weakness in markets is due to Trump's on-again, off-again tariffs. President Trump's tariffs share some similarities with the Smoot-Hawley Tariff Act of 1930, which exacerbated the Great Depression. Both were implemented to protect American industries which led to retaliatory tariffs from other countries, significantly reducing global trade and worsening economic conditions.

However, there are also significant differences in context and impact. During the Great Depression, the global economy was less integrated, and the Smoot-Hawley Act was enacted during a period of economic downturn. Today's economy is more interconnected with complex supply chains. Also, there was no international trade organization like the World Trade Organization (WTO) to regulate and mediate trade disputes which would potentially limit the escalation of trade wars.

Further, Trump's Tariffs are more targeted and not as comprehensive as Smoot-Hawley who taxed over 20,000 goods. In consequence, the tariffs have raised concerns about economic slowdowns and inflation but are unlikely to cause a depression of similar magnitude due to current economic conditions and global trade structures.

Trump has already reversed some tariffs such reducing Canada's tariffs from 50% to 25%. Pressure from corporate leaders such as automakers and GOP allies may force further concessions. As of this writing, Trump plans broader “reciprocal tariffs” by April 2, 2025, risking prolonged economic damage. His ideological commitment to tariffs as a “powerful weapon” suggests he may prioritize political messaging over economic stability.

The -2.8% Atlanta GDP estimate captures short-term tariff chaos but likely overstates the risk of sustained contraction. Trump’s tariff reversals and corporate lobbying suggest partial relief is probable, softening the GDP blow. However, recurring trade policy whiplash will keep markets volatile, with stagflation (slowing growth + rising prices) as the critical risk. Goldman Sachs still forecasts 1.6% Q1 growth, citing one-off import distortions.

Nevertheless, Trump wants lower rates to spur growth and pay lower interest on the $7 T of debt that needs to be refinanced in the next 6 months. The fastest way to force the Fed's hand is to slow down growth in the short term. That means scaring the market away from stocks into buying bonds so rates drop. So even though tariffs are inflationary, the 10-year Treasury yields are falling. The Fed can then follow suit by lowering rates.

 
Stealth QE and lower rates will spur growth while a positive GDP can keep the US out of recession. Meanwhile, increasing global liquidity which correlates with strong ISM manufacturing data should help markets form a major low and start back into uptrends to once again reach new highs. But the question is how much lower do markets have to go before this major low is reached? If the tariffs force a recession, then prices are likely to head lower. Price/volume action of major indices and leading stocks will light the way. Whether the bounce is a major low will ultimately be determined by the data which affects key indicators such as interest rates which affect global liquidity which on a general basis, guides markets.

We are seeing indicators flashing potential major lows almost similar to during COVID such as AAII sentiment for stocks and the fear & greed index at 15 which is at the lowest level since Sam Bankman-Fried's FTX collapse in late 2022. Meanwhile, while retail is selling, institutions and large bitcoin wallets are accumulating bitcoin. So either we are near major lows or we have a major recession on the way caused by Trump's tariffs and an overbought market. Of course, one could take a position near market lows with the low of the market as their sell stop. Alternatively, one could wait for a confirmation day on the NASDAQ Composite together with strong action from leading stocks which ends up buying a little later but with less risk.

Jobs report

On unemployment, many believe AI and DOGE will lead to soaring unemployment observed just before and during recessions. While AI is likely to increase unemployment in certain sectors, particularly those with routine or repetitive tasks, it will also create new job opportunities in AI-related fields. The net effect on unemployment in the coming quarters will depend on the balance between job displacement and creation. The monthly jobs reports may not immediately reflect these changes due to the gradual nature of AI adoption and the emergence of new roles. History shows new technologies generate more jobs than reduce the total number of jobs. AI should be no different though the impact on a percentage basis of jobs made redundant vs. jobs created will be more deeply felt than in prior cases involving other bleeding edge technologies.

Meanwhile, DOGE layoffs could bump numbers up short-term—maybe 0.2–0.5% nationally if 200,000–300,000 jobs go. But systemic factors (private sector growth, worker mobility) suggest the effect will be a one-off.

Nevertheless, these sharp transitions of Trump's tariffs together with jobs being eliminated or made redundant explains why volatility has been center stage.