Wall Street firms have raised their odds of a year-end recession, citing growing risks from President Trump’s escalating trade policies. However, with tariffs creating whiplash for businesses and consumers alike, economists caution that the economic impact could arrive sooner than anticipated, casting uncertainty over the broader outlook. As some Wall Street watchers have noted, the National Bureau of Economic Research’s (NBER) Business Cycle Dating Committee, the official group tasked with declaring recessions, only makes the call after analyzing months of economic data. That means we often don’t know we’re in a recession until it’s already underway, or even over. But there are yellow flags to pay attention to. “How far to the point of no return — a recession?” Evercore ISI analyst Julian Emanuel asked in a Sunday note. “The answer lies in the jobs market.”
Widely seen as the economy’s last line of defense, employment has remained remarkably resilient – much like it did in 2022 and 2023 during the previous major wave of recession fears. Yet, economists warn that strength may not hold through the back half of the year, particularly if prolonged tariff uncertainty continues to erode business confidence. Extensive analysis of economic indicators reveals a confluence of factors contributing to this heightened recessionary concern. The core of the issue stems from the sustained imposition of tariffs by the U.S. government, aimed at addressing trade imbalances with various nations. These tariffs have disrupted established supply chains, increased import costs, and heightened price pressures across numerous sectors of the economy. Simultaneously, shifting attitudes toward risk within the financial markets have amplified these concerns. Investors, wary of future economic developments, have adjusted their portfolios accordingly, contributing to a cautious sentiment that further dampens economic activity.
Early signs of stress are already emerging. On Wednesday, U.S. economic growth contracted for the first time in three years while private employers added fewer jobs than expected. This contraction reflected a slowdown in the pace of business investment and consumer spending. Following this, a bleak consumer confidence reading for the month of April, underscored growing uncertainty regarding President Trump’s trade policy—and all of the administration’s flip-flopping—further fueled inflation expectations and weighed on the labor outlook. Similarly, separate data from the Bureau of Labor Statistics out Tuesday showed March job openings fell to their lowest level in nearly four years, another sign that the labor market is continuing to cool. And while weekly jobless claims remain historically low, and below the 300,000 “red flag” rate, anecdotal reports of layoffs have widened, with companies like United Parcel Service (UPS), Meta (META), Chevron (CVX), Estée Lauder (EL), and others announcing job cuts in recent days and weeks.
Economists emphasize that the first real cracks likely won’t appear in headline unemployment numbers, but in other indicators, such as a rise in initial claims from small businesses or a slowdown in hiring among large corporations. Still, there’s no perfect gauge for assessing the labor market’s real-time health, and many U.S. companies are treading carefully. Businesses have learned from past recessions that if they’re too aggressive in letting people go and making other permanent changes, those choices are very hard to reverse once the economy recovers. James Egelhof, chief U.S. economist at BNP Paribas, told Yahoo Finance that businesses generally believe tariffs will moderate in the coming weeks and that the uncertainty surrounding trade will become clearer as the administration wraps up negotiations. Case in point: the much-needed reprieve for automakers. On Tuesday, the White House confirmed the government will support automakers by not layering additional tariffs on foreign-made cars on top of the existing tariffs already imposed by the administration. Businesses don’t want to conduct layoffs because they’re afraid that much of this uncertainty will come down. Plus, consumers are still spending, which has kept sales relatively healthy. If sales are disrupted or businesses have trouble stockpiling or pricing items, that could quickly lead to material labor market weakness.
Adding to the complexity is the potential for tariffs to disrupt supply chains, much like during the COVID-19 pandemic. Incoming shipments at the Port of Los Angeles are projected to be down about 36% year over year for the week ending May 10, signaling possible trouble ahead for the flow of goods. This is something that could very well happen today, and that is when things really start to unravel. Even if the Trump administration reverses course on tariffs, economists caution that the damage may already be done. These types of actions create disruptions in the normal workings of the economy. Eugenio Alemán, chief economist at Raymond James, told Yahoo Finance that he equated the current situation to what happened during the COVID-19 pandemic as consumers rushed to buy excessive amounts of toilet paper, causing it to disappear from store shelves. One reason for the toilet paper shortage was that prices couldn’t be adjusted amid that surge in demand. When prices can’t be raised in response to higher demand, companies might decide it’s better not to sell at all. The more inventories accumulate, the deeper the eventual contraction could be.
Ultimately, the Federal Reserve faces a significant challenge. Pricing pressures, especially in categories like autos, are likely to show up quickly if tariffs remain in place. However, clear evidence of labor market weakening will take longer to surface, making it even more challenging for policymakers to respond effectively. The situation highlights the interconnectedness of global trade and domestic economic conditions, emphasizing the need for careful consideration of the potential ramifications of trade policies.
