TD Cowen’s Jeffrey Solomon Warns of a Potential U.S. Recession in 2023 Amid Tariff Tensions
An Overview of the Economic Concerns
Jeffrey Solomon, President of TD Cowen, has raised concerns about the U.S. economy possibly slipping into a recession as early as the second half of 2023. His concerns are largely driven by the impact of tariffs imposed on key trading partners such as Canada, China, and Mexico. These tariffs could trigger retaliatory measures,leading to a trade war that might slow economic growth. Solomon emphasizes that while not certain, the likelihood of a recession is significant due to these trade tensions and their potential effects on business decisions and investments.
Signs of an Economic Slowdown
Recent economic indicators suggest a slowdown. The Atlanta Fed’s GDPNow tracker estimates a 2.8% contraction in GDP for the first quarter, marking the first decline since the brief technical recession in 2022. Job growth has also decelerated; January saw only 143,000 payroll additions, below the expected 169,000. The private sector added a mere 77,000 jobs, far less than the anticipated 148,000. These figures indicate potential weakness in the economy, which could worsen if trade conflicts escalate.
The Potential for Stagflation
Economists are also warning of stagflation, a scenario characterized by high inflation and low growth. Torsten Sløk of Apollo and Dhaval Joshi of BCA Research predict this could emerge, with Joshi suggesting a "mini-stagflation" may occur as early as the second quarter. With inflation around 3%, the stagflation concern focuses on the upcoming growth slowdown. This combination could pose significant challenges, complicating efforts to control inflation without stifling growth.
Retaliatory Measures from Trading Partners
Canada, China, and Mexico—major U.S. trading partners—have announced retaliatory tariffs. Canada imposed a 25% tariff, while China levied 10% and 15% tariffs on various U.S. goods. These actions could disrupt supply chains and deter business investment, potentially leading to broader economic impacts. The interconnected global economy means such tariffs could have far-reaching consequences.
Underestimation of Tariff Impact by Markets
Solomon notes that markets may not have fully accounted for the effects of tariffs. Uncertainty is a significant factor. If businesses delay investments due to unclear trade policies, this wait-and-see approach could further slow economic activity. The delay in decision-making could exacerbate the economic downturn.
Expert Opinions and Historical Context
Solomon joins a minority of forecasters predicting a 2025 recession, while most economists anticipate a soft landing. However, the current slowdown, combined with trade tensions, suggests heightened risks. Comparisons to historical events, like the 2018-2019 trade disputes, highlight the potential for stagflation. Central banks may face challenges balancing growth and inflation control, needing precise policy measures to navigate these complexities.
In conclusion, while a recession is not guaranteed, the combination of tariff impacts, economic slowdown signs, and potential stagflation presents significant risks. Monitoring trade developments and economic indicators will be crucial for understanding the path ahead.
