Is there a “good recession” and bad recession, like good cholesterol and bad cholesterol? That is the question on my mind as world markets debate the prospects of the ‘R' word in the US, the planet's leading economy that accounts for a quarter of the world's GDP.
When the US economy sneezes, the world catches a cold. This time, the talk of recession is marked by geopolitical and geoeconomic uncertainties resulting from President Donald Trump's unconventional style that takes it away from the usual business cycles that lead to it. And that calls for an analysis that must go beyond usual factors.
Leading economists at Harvard University and credit rater Moody's see a 35% chance of a US recession, resulting from government spending cuts, various uncertainties, and the impact of the tariffs that Trump plans to impose on leading trading partners, especially China, Canada, Mexico and the European Union—though India is very much on the hit list too.
A 'Good' Price To Pay?
“Trumpcession” is the new word in town, and the man who may usher it in says he won't predict such a thing but suggests that a downturn may be a “good” price to pay for the profound changes that he wants to usher in. "There is a period of transition because what we're doing is very big. We're bringing wealth back to America…It takes a little time,” Trump told an interviewer.
Literature lovers may see Trump as a latter-day Don Quixote with a quixotic quest to “Make America Great Again”. Tesla billionaire Elon Musk is his apparent sidekick, Sancho Panza. However, like in the Miguel de Cervantes' novel that sees Sancho Panza suffering hardships from Don Quixote's delusional behaviour, Musk has seen his wealth erode substantially this week as recession fears mounted, with him losing as much as $29 billion in only one day. The net worth of the world's richest man was $486 billion last December, and is down $132 billion since.
Evidently, Trump is no romantic fictional Spanish knight from the 17th Century but a flesh-and-blood global leader in the 21st Century.
Is Big Tech Regretting?
While Musk's support for Trump is well known, this may also be a time to muse on Big Tech moneybags who attended the presidential inauguration ceremony in a show of courtesy to power. Would they have done better had they openly supported his Democratic rival Kamala Harris in last year's presidential elections? Since January 17, Musk has seen his wealth erode by $148 billion, Amazon founder Jeff Bezos by $29 billion, Google cofounder Sergei Brin (indirectly represented by CEO Sundar Pichai at the inauguration) by $22 billion, and Facebook co-founder Mark Zuckerberg by $5 billion.
But these are ifs and buts of ironic history. Hard facts suggest that the US economy has been doing rather well, thank you. It was eagerly waiting for an interest rate cut, and inflation seemed well under control when Trump came weaving his quixotic tariff sword, tilting at some of the biggest windmills of the global economy. An unexpected round of inflation may rise from import duties that increase costs for the average American, eroding her purchasing power.
The Real Situation Is Different
Public finances are a problem, but perhaps not as big as Trumpists make it out to be. The US federal debt has increased significantly over the past century, reaching a debt-to-GDP ratio of 121.9% in the last quarter of 2024. That may be worrying, but there is a lot else that suggests that the situation is not alarming. Not counting crisis years, such as the global financial meltdown of 2008 and the post-COVID 2020-21 period, the US federal deficit has been widening over the past four decades as a percentage of the GDP, being 6.4% in 2024, but in a steady sort of a way. The preceding three post-War boom decades saw the US enjoying deficits close to zero—that could be a charitable way of understanding Trump's nostalgia for American greatness.
In absolute numbers, the US budget deficit grew to $1.833 trillion for fiscal 2024, the highest outside of the COVID era, as interest on federal debt exceeded $1 trillion for the first time and spending grew on social security, retirement payouts and healthcare, besides military expenditure. The deficit for the year ended last September rose by 8%, or $138 billion. It was the third-largest federal deficit in US history. But then, that is no real indication because the overall size of the US economy has steadily grown from around $5 trillion circa 1990 to about $29 trillion in 2024.
The share of the US in global GDP was a powerful 40% in 1960 and has steadily fallen over the next few decades, but was still at an impressive 24% last year.
MAGA Quest
Trump wants to bring back manufacturing glory to America and also boost government revenues through his planned tariff hikes. But the current 4% unemployment rate is among the lowest in decades. What's more, services account for close to 80% of the jobs. It is difficult to imagine how the US can bring back manufacturing jobs on a large scale amid technological developments, like the growth of robotics, in a way that helps citizens.
What remains, therefore, is a MAGA quest for glory with a desire to prune the federal deficit and strengthen the US dollar—apart from domestic adventures, such as cracking down on illegal immigration and diversity-driven jobs.
The big question is whether Trump is offering an economic cure that is worse than the political malady. A lot depends on how trading partners respond to US threats, which, as of now, are more in posture and promise than measurable reality. The World Trade Organization (WTO) and bilateral trade retaliations are part of the trade war toolkit for countries including China and India. Geopolitical risks, such as the Russia-Ukraine war and the Gaza conflict, are additional factors that increase uncertainty in the air.
What If It's Only Pain, No Gain?
India, as is widely believed, may survive with minor bruises if a recession hits the US, but Trump's implied assumption that there is a price the US has to pay for the return of his romantically imagined American greatness is where the shoe might pinch for the country.
Trump, a lapsed real-estate dealmaker, may yet strike claimed international trade bargains to show that he is a successful boss. If that is restricted to optics, we may see a big economic bounce-back. Or else, the way the president is doing it, it looks like a snakes-and-ladders game in which the US is throwing some risky dice at its own economic future. A lot depends on how the average American suffers in terms of inflation or income cuts—or not. It may also be a good idea to find out what financially wounded billionaires think and do about expensive presidential gambles. That is the space to watch.
(Madhavan Narayanan is a senior editor, writer and columnist with more than 30 years of experience, having worked for Reuters, The Economic Times, Business Standard, and Hindustan Times after starting out in the Times of India Group.)
Disclaimer: These are the personal opinions of the author
