Trump chaos is damaging the economy – is a rescue too late?

Trump chaos is damaging the economy – is a rescue too late?

A version of this story appeared in CNN Business' Nightcap newsletter. Sign up for free to receive it in your inbox here.

Former President Donald Trump appears to be backing off some of his extreme positions on the economy. He is once again showing a U-turn on his tariff policies, renewing concerns that his chaotic approach has already caused serious economic damage.

New signals from the White House

On Tuesday, Trump indicated he was open to easing tariffs on China and said he had "no intention" of firing Federal Reserve Chairman Jerome Powell. This sudden change in tone is another indication of turmoil from the White House that could push the U.S. economy, and potentially other economies, into recession.

Consequences of uncertainty

According to Wendy Edelberg, a senior fellow in economic studies at the Brookings Institution, the uncertainty created by the White House is even more damaging than the tariffs themselves. "And the frenzy hasn't stopped yet. In fact, this is just another abrupt pivot." After one catastrophic week US stocks rose on Tuesday and Wednesday, which was seen as a sign of relief on Wall Street. Investors are pleased that the president is heeding warnings from CEOs and close advisers who say his 145% tariffs on China are unsustainable. In a press briefing in the Oval Office on Tuesday, Trump held back and did not attack Powell, in what was seen as a rare gesture of moderation.

A fine line

Still, U.S. stocks have fallen 11% since Trump took office in January, weighed down by constant changes and mixed signals from the White House on tariff policies that could fundamentally reshape global trade and slow economic growth. Despite the recent bounce, nearly $7 trillion in value has been wiped from the S&P 500 since record highs just two months ago, S&P Dow Jones Indices report.

Market fears and the consequences

Additionally, analysts and economists have diagnosed an increased risk of a recession this year, perhaps with a probability of 50% to 70%. However, these estimates are in constant flux due to Trump's ever-changing tariff orders. Even if all of Trump's tariffs were lifted today, the U.S. economy would still lose at least 1% of GDP to political uncertainty, says Kent Smetters, a professor of economics and public policy at the University of Pennsylvania's Wharton School.

The crisis of trust

“We forecast that GDP will ultimately fall by 5% if all tariffs are enforced,” he added. However, it must be clearly stated that the Trump administration has not yet had a public discussion about removing further tariffs. Tariffs on China could be reduced, but “they won’t be zero,” Trump said. In addition, universal tariffs of 10% and 25% tariffs on cars, steel, aluminum and some products from Mexico and Canada remain in place.

Economic uncertainties

Trump faces more than just financial challenges; its tariffs also have more than just economic costs. The ambiguity has paralyzed businesspeople, as well as some of America's closest allies and trading partners around the world. “The U.S. administration’s on-off customs diplomacy has led to a crisis of trust,” Gregory Daco, chief economist at EY, said in a report Wednesday.

Waiting for clarity

Restoring lost confidence will take time, especially given that U.S. tariffs can be raised or lowered at any time, often without notice. “Companies don't know where they stand,” Edelberg noted, pointing to a Fed study that found 75% of companies said they don't plan to increase their investments in the next six months. “Everyone is holding their breath because they don’t know what policies will be in effect tomorrow.” This uncertainty was also visible in the Fed's "beige book" report, which is a regular survey of companies across the country. Across industries, companies reported pausing or slowing hiring new employees while they wait for clarity.

Damage to America's brand

Meanwhile, America's reputation, both at home and abroad, has also suffered. Even some of the U.S.'s closest allies and trading partners are struggling to make sense of Trump's trade war. “The U.S.-Canada trade relationship is deeply damaged and will remain so forever,” Wolfers said. “It has become politically impossible for Canada to be pro-America…The damage is done.”