As the S&P 500 enters into a correction zone, leading economists weigh in on whether the U.S. economy is headed toward a recession amid an escalating trade war.
What Happened: Lawrence H. Summers, former U.S. Treasury Secretary, lambasted recent tariff policies, warning of potential recession risks and negative long-term consequences. In an interview with CNN on Thursday, Summers described these tariff policies as a “self-inflicted wound” that not only raises costs for businesses and consumers but also poses a threat to national security. He further stated that these policies are alienating allies while benefiting competitors in Asia and Europe.
Summers also highlighted the economic uncertainty caused by these policies, stating that it discourages spending and investment, which could potentially slow growth. He dismissed the idea of damaging the economy to pressure the Federal Reserve into cutting interest rates as a flawed strategy.
He warned that the odds of a U.S. recession have risen from 10-15% to nearly 50%, primarily due to policy shifts. Summers cautioned that arbitrary tariff increases and spending cuts could have long-term negative consequences.
Meanwhile, Mohamed El-Erian, called the speed of the correction ‘eye popping’ in his post on X, following the S&P 500’s 10% drop in three weeks. In his previous posts, he stated that he expects significant downward revisions to the U.S. 2025 growth projections from the IMF and Wall Street firms, ranging from 0.5 to a full percentage point, compared to the initial consensus forecast of 2.5% at the beginning of the year.
However, Justin Wolfers, Senior Fellow at Brookings Institute, still holds on to bits of optimism amid pessimism. He told CNN that a recession is ‘not inevitable,’ while reasoning that President Donald Trump has inherited a strong U.S. economy and he hasn’t been at the helm long enough to change much of that.
However, he acknowledged that this time, instead of external factors, the chaotic economic policies from the White House are a cause for concern. Wolfers explained how these policies are leading businesses and consumers to pause spending, which ‘could’ but ‘by no means necessarily’ spark a recession.
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Why It Matters: The comments from various economists come in the wake of escalating trade tensions. On Thursday, the S&P 500 entered technical correction territory, falling 10% from its all-time high, following Trump’s latest tariff threats wherein he threatened to impose a 200% tariff on French champagne and EU spirits.
The S&P 500, as tracked by the SPDR S&P 500 ETF Trust SPY, closed at 5,521 points, marking a significant drop from its February 19 peak of 6,147. This fresh wave of selling was triggered by escalating trade tensions, reinforcing economists’ concerns about the potential negative impact of recent tariff policies on the economy.
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