Despite the US reaching an agreement with China, economists say it is still too early to say the US economy is out of recession.
Over the past few months, economists have repeatedly warned that US President Donald Trump's trade policies will push the US economy into recession and high inflation, while paralyzing the supply chain of goods. However, on May 12, the US-China trade agreement has somewhat eased these concerns.
Accordingly, in the next 90 days, US import tariffs on Chinese goods will be reduced from 145% to 30%. Similarly, US goods entering China will have their tariffs reduced from 125% to 10%. Non-tariff barriers will also be removed.
The larger-than-expected tax reduction is a clear positive sign compared to just a few days ago. The new developments have made Wall Street rise, while also raising hopes that the US will avoid the nightmare of import tariffs.
However, it is still too early to say that the US economy is out of danger. The risk of recession remains, although the probability has decreased somewhat.
Import tariffs are now higher than at any time in the past few decades. Uncertainty is even higher. Confidence and trade flows have been damaged and are unlikely to recover immediately.
Moreover, there is no precedent for economists to predict what will happen next. No one knows how a modern economy will react after experiencing so many shocks in such a short time.
"We are not out of the woods yet. Some people say that Mr. Trump has turned around. But that is not true. The US still maintains the highest tariffs in a century," said Douglas Holtz-Eakin, a former economic adviser to the Republican Party.
The 145% tariff the US imposed on China was previously considered very high, equivalent to a trade embargo. Experts had warned that this tax would cause the risk of disrupting supply chains and cause goods to disappear from supermarket shelves.
Therefore, the trade deal has "prevented serious consequences that were imminent for the US economy," Erica York, Vice President of Tax Policy at the Tax Foundation, said on CNN. The Trump administration's drastic tax cuts "show that they realize it would be a disaster".
A senior White House official said that despite appearing tough, Mr. Trump is still very sensitive to images of empty shelves and negative reactions from financial markets to the risk of escalating the trade war.
"Fortunately, both sides have decided to save the economy. The US has seen an existential crisis for many small businesses," Peter Boockvar, chief investment officer at Bleakley Financial Group, wrote in a report on May 12.
However, despite reducing import tariffs with China to 30% for at least 90 days, this level is still significantly higher than at the beginning of the year. Moody's Analytics calculated that, based on the framework agreements with China and the UK, the average import tariff on goods entering the US has decreased from 21.3% to 13.7%. This is still the highest level since 1910.
Mark Zandi, chief economist at Moody's Analytics, predicted that at this level, US inflation could increase by more than 1 percentage point over the next year. The size of GDP is also forecast to decrease by a similar amount.
Thanks to progress in US-China negotiations, Zandi lowered his forecast for the possibility of a US recession this year from 60% to 45%. "The economy is going to have a tough year, but it may avoid a recession. However, any other shock could make things worse," he said.
In other words, the trade war has weakened the economy's resilience. Justin Wolfers, an economics professor at the University of Michigan, wrote on X: "It's true that the trade and economic outlook is brighter today than it was yesterday. But it's also fair to say that the situation is much worse than when Trump took office."
Wolfers once warned that the probability of a US recession could be as high as 75% if all reciprocal tariffs were implemented and maintained. Now, he said the risk of a recession has dropped sharply, but remains at 50%.
"We've seen a completely unnecessary disruption to supply chains. That's not going to be reversed overnight. It's going to take time to recover," he said on CNN.
On May 12, Goldman Sachs also lowered its forecast for the probability of a US recession this year from 45% to 35%. Kathy Bostjancic, chief economist at Nationwide, expects the US economy to grow slightly this year, instead of remaining flat as previously predicted. Nationwide also estimates inflation to rise to 3.4% this year, an improvement from 4% before the deal was announced.
However, the US-China trade war is not over yet. When asked on May 12 whether tariffs would return to 145% if negotiations fail, Mr. Trump said: "No, but they will increase significantly. Regardless, I think we will still have a deal."
The US president is still considering tariffs as a powerful tool. Many sectoral tariffs can still be applied, such as on wood, semiconductors, pharmaceuticals, copper, mineralsstrategy and trucks.
Last week, the US Commerce Department launched a national security investigation into aircraft, jet engines, and aircraft components, a first step toward possible tariffs on the aviation industry.
The threat of further tariffs is why Joe Brusuelas, chief economist at RSM, is keeping his forecast of a 55% chance of a recession in the next 12 months. "The deal helps prevent a decoupling of the US and Chinese economies. However, there are still too many details, especially on sectoral tariffs, and the risk of a recession cannot be ruled out," Brusuelas explained.
The level of uncertainty around trade policy has spiked in recent months, reaching its highest level since the 1960s. The surprise tariff cuts between the US and China will ease financial pressure on businesses, but at the same time add to the uncertainty.
Wolfers said investors and businesses are still holding their breath waiting for the next shock from the White House. "What are the chances that we have 90 days of peace ahead? Today is good news. But the real good news is that someone can stop him from making these decisions," Wolfers said.
(according to CNN, Reuters)