Executive Summary:
We believe in the resilience of the US economy. Recent years’ monetary tightening didn’t bring on a recession; this year’s tariff turmoil isn’t likely to either. We’re lowering the odds we see of a recession back to 35%, where it had been in early March. One reason is that China and the US appear ready to start negotiating a trade deal. Trump needs to get past trade issues for the Republicans to keep their majorities in Congress after the midterms. … Also: The Index of Coincident Economic Indicators has been rising to new record highs. And Friday’s jobs report boosted our confidence in the labor market’s resilience. …And: Time to raise our S&P 500 target? Check out the accompanying chart collection.
US Economy I: The Godot Recession Is Back.
During 2022, 2023, and 2024, most economists and investment strategists expected that the dramatic tightening of monetary policy would cause a recession. They observed that the inverting yield curve and the falling Index of Leading Economic Indicators were confirming this outlook. We argued that the recession was the most widely anticipated recession of all times that wasn’t likely to happen. We called it the “Godot recession.” We focused on the reasons for the underlying resilience of the economy and dismissed the widely followed leading indicators of recession as misleading.
The Godot recession may be back in 2025. This time, the cause of the widely anticipated downturn is Trump’s Tariff Turmoil.
According to Polymarket.com, a trading platform, the chance of a recession was relatively low around 20% from the time President Donald Trump was inaugurated on January 20 through March 11.
▌View Related Live Charts: US - Probability of Recession in A Year (10Y-3M Model)
The odds then shot up dramatically, especially after April 2 (“Liberation Day”), reaching 64% on April 8. They fluctuated around 55% after Trump postponed for 90 days the reciprocal tariffs that he had announced on April 2 for all countries with one notable exception: China’s tariff remained 145%. The odds of a recession rose to 66% on May 1 following last week’s batch of weak economic indicators (i.e., consumer confidence, ADP payrolls, M-PMI, and jobless claims). The odds fell to 60% on Friday, May 2, following the release of a stronger-than-expected employment report for April.
While economic growth remains our base-case scenario, we did raise our subjective probability of a “tariff-induced” recession from 20% at the start of the year to 35% on March 5. We wrote, “We are still betting on the resilience of consumers and the economy. However, Trump Turmoil 2.0 is significantly testing the resilience of both. That’s why we’ve recalibrated our subjective probabilities.” On March 31, we raised the odds again to 45% and blamed Trump’s Reign of Tariffs. We wrote, “That 45% is also the probability we see that the stock market’s correction will deepen into a bear market in coming months. Yet we still expect an up year, with the S&P 500 rising above 6000 by year-end.”
In other words, we remained, and remain, believers in the resilience of the economy. It withstood the tightening of monetary policy over the past three years. We expect it will withstand this year’s tariff turmoil.
US Economy II: Lowering Our Odds of a Recession.
We are now lowering our odds of a recession back down to 35% because we believe that China and the US both may be ready to suspend their tariffs on each other while they negotiate a trade deal. In other words, both sides may be starting to blink. Neither side can bear the pain of a trade war, which might be more painful for China’s economy than America’s economy. On the other hand, Americans have less tolerance for pain than the Chinese (for more on China’s “chiku” ethos, see the Morning Briefing dated April 29, 2025).
We also expect that Trump will declare victory in his trade war with the rest of the world. By the end of the 90-day postponement period of his Liberation Day reciprocal tariffs, the US is likely to have signed numerous agreements with America’s major trading partners. Stragglers might come around during a second 90-day postponement period. Trump needs to put the trade issue behind him to reduce the odds of a recession, which would harm the Republicans’ chances of holding onto their slim majorities in both houses of Congress.
Trump also needs to get this issue resolved quickly now that numerous court cases have been filed challenging his constitutional authority to impose tariffs under his claim that they are warranted by a national crisis that he declared.
We anticipated all the above in our April 7 Morning Briefing titled “Annihilation Days.” We wrote:
“Trump’s Liberation Day last Wednesday triggered Annihilation Days on Thursday and Friday, with the Stock Market Vigilantes giving a costly thumbs-down to Trump’s Reign of Tariffs. Trump officials say they aim to make Main Street wealthy again even if that’s bad for Wall Street. The problem is that Main Street owns lots of equities traded on Wall Street, so the two streets prosper and suffer together. Congress can’t do much to stop Trump given his veto power, but he might get the message that hurting Main Street’s stock portfolios can cause a recession and jeopardize the GOP majority in Congress. If so, he might postpone the reciprocal tariffs, giving trade negotiations time to work. Also, the courts might block Trump’s tariffs. An early end to Trump’s tariff nightmare would result in a V-shaped stock-market bottom. We’re counting on that; the alternative is just plain ugly.”
Sure enough: Trump postponed his reciprocal tariffs two days later, on April 9. The S&P 500 traced out a V-shape, bottoming on April 8 and climbing 14.1% since then through Friday’s close.
▌View Related Live Charts: US - S&P 500 Stocks above 200-Day Average
▌View Related Live Charts: US - Sector Performance Relative to S&P 500 Index
We aren’t dismissing the possibility of a recession. There could still be ...
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