US Tariffs: Recession Risk Looms as Trade Tensions Persist

Persistent trade frictions continue to cast a shadow over the global economic outlook. Amidst this uncertainty, BCA Research highlights a critical concern: existing US tariffs, despite recent adjustments, remain at levels that could trigger a significant economic downturn in the coming months. The firm points out that these tariff levels are the most elevated seen since the 1930s, maintaining a tangible risk of recession even amid temporary signs of relief.

Market Volatility and Tariff Landscape

Recent market activity has been notably volatile, reacting sharply to shifting trade policy signals. While President Donald Trump initiated a temporary halt on certain “reciprocal” tariffs targeting various nations, tariffs specifically aimed at China were simultaneously increased. This contributed to market swings throughout the week, although the White House later expressed optimism regarding progress towards a trade agreement with China. Regardless of short-term market movements, BCA Research underscores that overall US tariff rates are hovering at their highest points since the 1930s, sustaining significant economic pressure. Investors remain watchful of trade developments and global economic data.

Recessionary Fears and Market Outlook

BCA Research maintains a cautious, even bearish, stance on market prospects. Their analysis projects a potential decline for the S&P 500 index before the year concludes. The firm estimates the index could fall towards 4,450 points, representing a substantial drop from recent levels, with a deeper slide to the 4,200 mark considered a possibility.

Peter Berezin, BCA’s chief global strategist, articulated the ongoing risk clearly: “Even with the reciprocal tariffs paused, the current overall tariff levels remain historically high. Without a clear de-escalation, the risk of the U.S. and other countries entering a recession in the coming months is significant. For now, investors should exercise caution.”

Consumer Spending Under Pressure

The potential economic drag identified by BCA extends directly to consumer behavior, a crucial driver of the US economy. Berezin noted that even if tariffs on Chinese goods eventually decrease, other sectors might still face elevated rates. Furthermore, the absence of finalized trade agreements could expose additional countries to higher tariffs down the line.

A significant concern highlighted is the deceleration in real income growth, which registered a modest 1% in February. Should this sluggish trend continue, Berezin warns that real income growth could turn negative later this year. Such a development would inevitably put the brakes on consumer spending, weakening a key pillar of economic expansion.

Market Perception and BCA’s Stance

According to BCA’s analysis, the current market environment does not adequately price in the probability of a recession. Key indicators like stock valuations, credit spreads, and commodity prices have yet to fully reflect this downside risk, in their view.

BCA has consistently been among the more pessimistic voices regarding the economic outlook recently. However, their cautious positioning has aligned well with market movements earlier in the year. In March, the firm reduced its exposure to equities, increasing allocations to bonds and cash, citing the potential for tariffs and government efficiency cuts under the Trump administration to accelerate an economic downturn. Their economic modeling currently indicates a potential recession starting in late 2024 or early 2025.