We Are Not Heading into a Recession and the Market Is Not about to Collapse

March 10, 2025

From Robert Wiedemer

This Is Nothing Unusual

The S&P is only down about 4.3% year to date and most of that loss – 2.7% -- occurred in just one day -- today. Yes, the S&P is down 8.6% from its most recent high, but that’s not even a 10% correction. Even if it reaches 10%, such corrections are not that unusual and happen a couple of times almost every year.

What was unusual today is that the market dropped 2.7% on no real news – simply an interview President Trump had with CNBC where, when asked if he predicted a recession, he said he wasn’t sure – it could happen. Such a negative reaction to that comment sounds a lot more like bearish sentiment is amplifying small issues rather than actually being a big issue. I already discussed in my March 2 newsletter why I think sentiment is so bearish lately.

So, I don’t think the market is about to collapse and I don’t think it will collapse in the near future due to either tariffs or a recession. Here’s why:

We’re Not Going to Have a Recession – Congressional Economic Stimulus Is Massive and Growing Massively

As I have said before, it’s hard to have a recession when the government is borrowing $2 trillion a year. That’s a massive stimulus to the US economy. What’s more, our deficit is increasing this year at a rate that is shocking – even to me! If you remember I mentioned earlier that the deficit in the first quarter of this fiscal year had grown 39% compared to the first quarter of last year? Well, I took a look at how we are doing after January and was stunned to see that the deficit is now 58% higher than the first four months of last year.

If we continue at that rate of expansion for the whole year, we will see an increase in our deficit to the tune of $1.2 trillion for a total deficit (better to call it irresponsible borrowing) of $3.2 trillion this year.

With that kind of stimulus, a recession is Not. Gonna. Happen.

DOGE Cuts Won’t Make a Bit of Difference to that Level of Deficit

Even if Mr. Musk is able to wield his chainsaw and cut $100 billion of spending, it’s meaningless. Such a big cut means we would have a deficit of $3.1 trillion instead of $3.2 trillion. It’s more than a rounding error, but not much.

And given the legal and political challenges he now faces with many of those cuts, I would be very surprised if he hits $100 billion. Plus, President Trump has now declared that he must make suggestions to Cabinet officers instead of bypassing them to cut expenses and that we will proceed with cuts using a scalpel instead of a chainsaw.

Now I honestly can’t imagine that we will continue at the rate of a 60% increase this year, but I am getting more convinced that it could be 30%, which is still huge.

Also, with tax cut discussions coming up, I suspect we will see an increase in borrowing. I have seen in the past that tax cuts are far more popular with Congress than spending cuts. Hmmm – big surprise?? So, I don’t expect them to equal out – we will get more tax cuts than spending cuts and get a larger deficit. I’ve been to this rodeo before.

Will Tariffs Devastate the Economy? Not Likely, but They Could Easily Devastate Republican Control of the House

First, we don’t even know if tariffs will be implemented. And we don’t know what amount they will be. If we simply looked at the past couple months, we would have to say that few tariffs will be implemented and they will be fairly small.

That could change in April, although I suspect President Trump will be reluctant to support the truly disruptive 25% tariffs on all goods from Canada and Mexico. I have found few businessmen, academics, or Republicans who support high tariffs. President Trump could ignore all that, but I’m not sure he will.

But let’s assume he adopts high tariffs. After President Trump’s big increase of tariffs on China (that President Biden did not remove) our government’s total revenues from tariffs amounted to $80 billion in 2024. Now what’s our current GDP? For 2024 it was $29.7 trillion. So, tariffs amounted to 2/10ths of 1% of our economy. Even if the amount of tariffs were doubled, tripled or quadrupled, it’s simply not a big factor. And it’s certainly not devastating to the economy.

However, politically, it can be quite devastating because the retaliatory tariffs from other countries will fall heavily on farm goods and manufactured goods which will lower their sales. Farmers are a powerful political group that is heavily Republican. Manufacturers lean Republican and their workers are some of the swing votes that helped get Trump elected.

Those farmers and manufacturing workers could easily flip 5 or 10 seats in the House costing Republicans, and President Trump, control of the government. Does Trump want to risk that? Will the Republican Congress want to risk that? I doubt it. It’s simply not a core issue and there are few real supporters of high tariffs.

Massive Deficits Crush Any Negative Impact from Tariffs

Finally, the stimulus from massive government borrowing and massive increases in borrowing would completely crush any negative impact from tariffs. These deficits are like nothing we have seen before outside of World War II. They are a huge stimulus for our economy.

Most analysts on Wall Street ignore this completely because they don’t like the US borrowing so much money. Well, I wrote Aftershock, and I couldn’t agree more. But that doesn’t mean I am blind to the short-term stimulative effects. Why do you think we have run up such an enormous debt?