(Yahoo! Finance) - President Donald Trump this weekend demurred on the question of whether his administration’s trade policies could send the US economy into recession, following up his recent acknowledgement that they may cause a “little disturbance.”
Some consistent — albeit equally vague — messaging is emerging, however. The US president and his economic team have been priming markets and the American people to expect some pain as a result of their trade policies, with Treasury Secretary Scott Bessent warning of a “detox” period and Commerce Secretary Howard Lutnick saying there are certain to be “distortions.”
The question is how much pain is involved with "disturbances," "distortions," and "detox." The economy grew by 2.8% last year. For this year, the average of economists’ forecasts gathered by Bloomberg shows an expectation of 2.3% growth. Recently, estimates have been coming down as a result of first quarter tariff turmoil.
At a “stall speed” of 1% GDP growth or below, what the Trump administration is trying to achieve looks a lot less palatable, Mohamed El-Erian, president at Queens College, Cambridge, and former PIMCO CEO, told Yahoo Finance in an interview.
“We’re getting closer to stall speed,” El-Erian said. “And if we get to stall speed, then the journey becomes too difficult for the destination. And that’s going to be the big question as we look forward.”
For now, El-Erian sees growth this year ending up at 1.5% to 2%. He’s factoring in the chance of a recession at 25% to 30%, up from an earlier probability forecast of only 10%.
But he emphasizes that a recession is “not the baseline" due to the "structural strength of the US economy," as well as promises of deregulation, tax cuts, and cheap energy.
As El-Erian sees it, the Trump administration’s vision for remaking the economy and the federal government is four-pronged:
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“A fairer trading system so that US goods are not discriminated against in global trade.”
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“They want to detox the economy from its high dependence on the public sector.”
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“They want to enhance the efficiency of government.”
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“They want to unleash the private sector through deregulation and favorable tax treatment.”
Investors seemed broadly on board with those goals after the election, sending stocks soaring. But the volatile and uneven application of tariffs has now sent markets tumbling and increased the importance of the administration’s planned tax-cut extension and other policies to try to juice growth.
As El-Erian said, “You're getting a sequencing where the negative effects are being felt first and the positive effects are promised in the future. And that's what the market is getting used to.”
If the negative effects slow economic growth to 1% or below, the habituation process could be even rockier.
By Julie Hyman - Host
