Some charts you should really think hard about
What does all of this recent economic noise mean?
So what should we make of all this? Below are some general thoughts; I’d certainly welcome any feedback from readers.
U.S. Federal deficits are going up, not down. Period.
U.S. manufacturing output is going down, not up. At least in the medium term. American manufacturing job loss and layoffs are already happening because orders are down and the cost of raw materials is rising. Can this be reversed in the longer run if the tariffs stick around? Maybe, but tariffing everything you need to build a factory (steel, aluminum, machine tools, gypsum, lumber, etc) is not going to help anyone build new facilities. Providing incredibly contradicting and unclear instructions about tariffs is freezing most capital investment. Most likely scenario is that U.S. manufacturing (not necessarily the entire economy) goes into a recession under Trump.
We are about to lose many, many American small businesses. Personally I am disturbed by how little the administration seems to notice or care about this. It’s one thing for the government to decide that trade-dependent businesses should move their supply chains to the USA, and for government to prod those businesses along gradually with carrots and sticks. It’s another thing entirely for the White House to unilaterally put your company out of business.
Forecasting the Fed response to all of this is challenging. On one hand, recent CPI/PPI readings have been very low, and high tariffs are recessionary which should provide rationale for cuts. On the other hand, tariffs are expected to have an inflationary impact on the PCE. On the THIRD hand, this administration’s efforts to deregulate and open up the energy industry should continue to bring gas and electricity prices lower, counterbalancing the tariff impact. This isn’t like early 2024 when the Fed was obviously going to cut, the question was just how much.
The “4D chess” / Mar-a-Lago Accord endgame for all this — which is a new state of the world with a reconstituted pro-U.S. / anti-China trading bloc with lower rather than higher overall barriers to trade — requires the rest of the world to cooperate with us in “cutting deals” so that we can get tariff rates down before they cause a recession in the USA. Here’s why I’m skeptical of this working out: We have created a political dynamic where other countries’ leadership becomes more popular when they defy the United States rather than cooperate. Just look at the Canadian election, where the Liberal party moved from 20-1 underdogs to favorites to hold power just in the last couple of months, because the alternative party (the Conservatives) is perceived as cozier to Trump. How are we going to cut a grand bargain when foreign Prime Ministers worry they will get thrown out of office if they work with us?
Democrats are now 83% betting favorites to take the House in 2026 (up from 67% five months ago). Trump’s net approval has gone from +12 to -5 in less than three months. Many people are making the assumption that this approval number will not go down much further because Trump has a relatively high floor of ironclad support… I am not so sure about that. If we do get a manufacturing recession (or perhaps an economy-wide recession), increased SMB bankruptcies, higher prices for everything except for energy, and more pain in the stock market, we may nestle in the range between -10 and -20. That may be enough for GOP Congresspeople to fear enough for their reelection to break from MAGA. What happens then? Will we see Congress take back the power to tariff from the President?
DOGE is the wildcard in all of this. It’s reasonable enough to say that the DOGE cuts have not yet showed up in the spending numbers because they’ve only been at work for 12 weeks. But what happens if we get to, say, August, and overall discretionary Federal spending still hasn’t budged? Right now the general public has only been able to verify 8% of the total spending that DOGE has claimed it has cut. If it turns out all the chaos and big Musk promises amounted to negligible impact, what will the political consequences of that be? Many moderates are currently withholding judgement on the Trump administration because they believe DOGE’s role as an efficiency-improver and waste-cutter is necessary for America to avoid a debt death spiral. If those Trump-tolerating moderates lose that faith… then what?