Indications point to recession, not inflation, as greater risk

The announcement of new tariffs by President Donald Trump has thrown the U.S. economy into uncertainty. While some experts worry that these tariffs could lead to inflation, the bond market and truckload volumes are indicating a more immediate risk of recession due to suppressed consumer demand and business activity.

Trump’s declaration of steep tariffs on imports, including a minimum 10% duty on all exports to the U.S. and higher tariffs on nations with trade imbalances, has raised concerns about GDP growth and increased goods prices. However, rather than causing inflation from higher import costs, the bond market is signaling worries about economic growth. The yield on the 10-year Treasury note fell below 4% for the first time since October, suggesting investor unease about recession risks.

Investors have flocked to government bonds, driving up prices and lowering yields, indicating a higher possibility of an economic contraction than persistent inflation. The market is now anticipating a 50% chance of four interest rate cuts by the Federal Reserve this year, with the first expected in June. This shift in expectations shows a growing concern about recession due to the timing of tariffs and tax policies.

The decline in trucking demand, as indicated by the Outbound Tender Volume Index, is a worrying sign of broader economic weakness. While intermodal volumes have maintained growth, the sharp drop in truckload demand indicates potential downstream consumption issues. The lack of consumption growth paired with increased inventory is unsustainable in the long run, further pointing to a slowing economy.

The combination of falling bond yields and softening freight volumes highlights the need for policymakers to focus on recession risks rather than inflation concerns. While tariffs may impact inflation in some sectors, the overall macroeconomic impact appears to lean towards slower growth and potential recession. Observers like Bob Michele from JPMorgan Asset Management warn of an impending recession unless there are significant changes.

The coming days and weeks will be critical for both investors and policymakers to ascertain whether the recession signals are accurate. The upcoming jobs report will provide insights into labor market health, while upcoming economic indicators will play a crucial role in determining the trajectory of the economy. The focus now shifts towards supporting economic growth as recession risks loom large.