Former Senator Toomey (Politico):
“We have a recession coming. That’s what the response would be from a full-blown trade war that [Trump] would precipitate,” Toomey said, referring to the president-elect’s trade proposals. Those include tariffs of up to 20 percent on all imports, tariffs of at least 60 percent on China and more radical positions such as swapping the income tax with tariffs.
The October WSJ mean forecast was for 1.92 ppts growth in 2025 (q4/q4). McKibben-Hogan-Noland (2024) placed the impact of 10% overall tariffs and 60% tariffs on Chinese imports as about -0.12 ppts deviation from trend and +0.02 ppts deviation from trend, respectively, in the no retaliation scenario in 2025; -0.35 ppts and -0.08 ppts respectively in the with-retaliation scenario. This means output would roughly drop by about 0.43 ppts relative to baseline, so no recession in 2025. However, in 2026, the combination with-retaliation scenario implies 1.3 ppts reduction relative to baseline. Goldman Sachs has y/y growth by end-2025 as about 0.55 ppts below baseline, assuming partial imposition of Trump proposed tariffs.
Note that the McKibben-Hogan-Noland calculations don’t explicitly take into account a rise in economic policy uncertainty, such as the one that occurred in the last trade war. To the extent that uncertainty deters investment, one might very well get pushed into recession territory.
Adding forced deportations to a trade war might make the numbers add up to a recession in 2025.
Toomey argues that Trump would suffer little political harm if he were to forget about raising tariffs. Toomey has made his point in a clumsy way – Trump is term limited, so is to some degree immune from political harm. More importantly, Toomey is engaging in wishful thinking. Trump won, and Toomey needs to prepare for the consequences, just like the rest of us.
The rest of the world will react when Trump imposes tariffs, but the reaction won’t be straightforward because the tariffs won’t be straightforward. Remember last time? There were all kinds of exceptions made to tariffs, mostly as the result of direct appeals to Trump – just the way he likes it. There were rounds of escalation with China which added to uncertainty.
Trump likes uncertainty when he’s the cause. (He apparently abhors uncertainty when he’s the one who’s uncertain – heck, just look at his meal choices.) His love of causing uncertainty should be taken into account when forecasting economic performance.
Trump has picked Congresman Micheal Waltz to be his national security advisor. Waltz has served on the House Armed Services, Intelligence and Foreign Affairs committees, was on VP Cheney’s national security staff and is married to Julia Nesheiwat; she would arguably be a better choice for the job than her husband.
Waltz supported the second Iraq war, opposed U.S. withdrawal from Afghanistan, and is highly adversarial toward Iran and China. Waltz has voted against funding for Ukraine’s defense and is an active election denier.
Might as well get use to him. He’s probably going to outlast Trump, even if Trump’s pattern of tossing out National Security Advisors like used tissues resumes.
Claudia Sahm is apparently miffed at the slavish acceptance of Phillips curve reasoning among the economics profession:
https://stayathomemacro.substack.com/p/unemployment-affects-everybody-too?utm_source=substack&utm_campaign=post_embed&utm_medium=email
I’m not the right guy to assess her arguments becI believe every one of them . Have I not harangued my fellow commenters on every one of these points?
When Powell became Fed Chair, he launched tha Bank on a search for a new, less Phillipsy way of managing monetary policy. A once-in-a-lifetime supply shock hits, and the Fed is back to making Pillips curve arguments, as are many economists outside the Fed. Seems pretty lame.
On 7/12/2019 Professor Chinn showed us his favorite Phillips model (Prof. Chinn, please correct if I misstated your comment).
The model seems to reasonably model PCEPI inflation on a quarterly basis. For 2024 Q3, the model shows PCEPI QQ % change of 2.6%, reported shows 2.3%, assuming I made the correct calculation.
The model includes, FRED series, PCEPI, UNRATE, NROU, MICH and IR (import price index).
AS: That model was estimated pre-pandemic. I’d probably want to include supply chain price pressure index either instead of or in addition to IR, now that we have that series.