Is Trump's Trade War Causing a Recession?

The Atlanta Fed’s GDPNow forecast plunged into recessionary territory, stocks wiped out $4 trillion in value, and consumers are pulling back. How long will Washington ignore the warning signs?

Any hope of robust economic growth resulting from unleashing energy abundance, deregulating the private sector economy, or pro-growth tax policy may now be doused by the economic fallout of a pointless trade war.

It started as a murmur—a slight downward revision, nothing alarming. But within five days, the Federal Reserve Bank of Atlanta's GDPNow forecast for the first quarter of 2025 went from mild optimism (2.3 percent growth) to outright recessionary territory (-1.5 percent). By March 3, the number had plunged to -2.8 percent, the kind of contraction that doesn't just signal weakness but outright economic distress. Eight months of stock market gains were wiped out in less than four weeks.

Yet there is deafening silence from Washington. The Trump administration remains deeply committed to its protectionist crusade, under the misguided belief that tariffs and trade barriers come at no cost to Americans. But reality is setting in, and the numbers don't lie. The ongoing trade war, with its uncertainty and economic distortions, is now visibly hammering investment, exports, and consumption—three pillars of growth. 

A significant downward revision in the real gross domestic product (GDP) forecast in late February was the first real shock. The trade imbalance increased dramatically, cutting almost four percentage points off GDP growth in one stroke, as businesses accelerated imports in anticipation of tariff hikes. This "front-loading" behavior has been observed in previous trade wars—companies rush to stock up on foreign goods before new tariffs raise costs, causing a temporary import surge.

Personal consumption, which has been an engine of growth since the pandemic, was revised down from 2.3 percent to 1.3 percent. That was the warning sign: consumers—who have been remarkably resilient—were starting to pull back. The economic data only worsened when the March 3 numbers came out. Private fixed investment, which includes business investment and residential investments, collapsed dramatically from 3.5 percent to near zero, while consumption also fell to near zero.

The most recent real GDP forecast update didn't signal much of an improvement—personal consumption fell again, with net exports continuing to reduce real GDP by 3.9 percent. It turns out protectionism and economic central planning have a very real price, and the bill for undermining free trade has come due.

It's not just GDP numbers flashing red. As anyone with a retirement account or personal investments would have noticed, the stock market has had a bad month. Economic uncertainty created by the tit-for-tat trade war has had a dramatic impact on investor sentiment. The S&P 500 has lost over $4 trillion in market value so far. 

In the three short weeks ending March 13, the S&P 500 dipped 10 percent, commonly referred to as a market correction, wiping out billions in household wealth. Retirement accounts, pensions, and personal savings have taken a direct hit as confidence evaporates in the face of declining economic fundamentals. This is not just an academic debate about GDP growth rates—this is real money disappearing from Americans' portfolios. 

GDPNow is not an abstract model—it's a real-time gauge of where the economy is headed. Such a significant collapse in economic fundamentals in such a short time frame is incredibly rare and signals a notable deterioration in business and consumer confidence. Investment doesn't just evaporate unless firms are genuinely worried about future demand and profitability. Consumption doesn't flatline unless households are beginning to feel squeezed.

Global supply chains are rattled, businesses are reluctant to invest in capital, and consumers are cutting back on purchases. Tariffs—pitched as a way to bring jobs back—have instead choked growth. The administration's bet that protectionism would insulate the economy from foreign competition is proving to be precisely the opposite: a self-inflicted wound.

The very politicians who decried economic stagnation in previous decades are now actively promoting it through top-down economic planning. This is industrial policy in practice—where Washington's heavy hand tries to override the natural forces of markets.  

We can't say that we weren't forewarned about this possibility. My colleague Veronique de Rugy wrote back in September that we shouldn't expect a return to the Trump economy. As she observed, "several of his policy ideas are destructive."

GDPNow is a real-time gauge of the health of the economy, and it is sending a loud message. The movement in the stock market is reinforcing this message. The question is: Will the Trump administration listen, or are we heading into a government-induced economic recession?