Hiring has slowed and inflation has worsened since President Trump announced sweeping tariffs in April.
The U.S. stock market crashed earlier this year when experts warned President Donald Trump’s tariffs could slow growth and raise prices, potentially pushing the economy into a recession. The S&P 500 (^GSPC 0.59%) fell more than 10% in two trading days before rebounding when the administration postponed its most severe duties.
Since then, President Trump has doggedly defended his tariffs despite cracks appearing in the U.S. economy. He fired the Bureau of Labor Statistics commissioner after a weak jobs report in August, claiming the numbers were “rigged.” But the next report was worse. The U.S. added an average of 27,000 jobs per month between May and August. Excluding the pandemic in 2020, hiring has not been so dismal since the aftermath of the Great Recession in 2010.
Meanwhile, President Trump says he has solved the inflation problem. “We have almost no inflation anymore,” he told Fox News in September. But the data says otherwise. Inflation has actually reaccelerated since he announced “Liberation Day” tariffs in April, and the latest report shows the situation is still getting worse.
Here’s what investors should know.
Economists expect inflation to worsen as companies pass more tariffs on to consumers
U.S. statisticians measure inflation with two different metrics. One is the Consumer Price Index (CPI), which tracks direct spending on goods and services. The other is the Personal Consumption Expenditure (PCE) price index, which tracks direct and indirect spending on a larger number of goods and services.
For example, health insurance premiums paid by employers on behalf of employees would not be included in the CPI, but would be included in the PCE price index. So, the CPI puts less weight on healthcare spending, but it also puts much more weight on housing simply because it tracks fewer goods and services.
The Federal Reserve prefers the PCE price index because it provides “a more comprehensive measure of inflation and more quickly picks up adjustments in consumer choices in response to price changes.” The PCE price index increased 2.7% in August. That is not only the highest reading in six months, but also a meaningful acceleration in inflation since 2.2% in April.
Experts say that trend will continue as companies pass along more tariffs to consumers. A Wall Street Journal survey of 67 economists puts PCE inflation at 2.9% in the fourth quarter, up from 2.4% in the second quarter. That leaves the Federal Reserve in a tricky position because policymakers must now balance a weakening jobs market with rising prices.
The economy may be closer to a recession than investors realize
The Federal Reserve typically raises the federal funds rate to curb inflation, but typically cuts the benchmark interest rate to correct weakness in the jobs market and stimulate economic growth. That leaves policymakers in a bind because President Trump’s tariffs have caused both problems to happen simultaneously, a situation known as stagflation.
Policymakers in September cut interest rates by a quarter point after holding rates steady since December. The stock market has usually performed well under those conditions. The S&P 500 has returned a median of 13% during the 12-month period following the first cut after a pause lasting at least six months. But there is an important caveat: The median return has been negative when the economy suffers a recession during that 12-month window.
With that in mind, a machine learning algorithm recently developed by Moody’s Analytics shows a 48% chance of a recession during the next 12 months. That algorithm seems to be remarkably accurate. It was back-tested on data collected between 1960 and 2025, and a recession followed any reading above 50% within months.
In short, the algorithm developed by Moody’s Analytics correctly predicted every recession in the last 65 years and we are dangerously close to the 50% threshold today. Investors should be at least somewhat worried by that data because the S&P 500 has suffered an average peak-to-trough decline of 32% during recessions since 1960.
“The economy is on the precipice of recession. That’s the clear takeaway,” Mark Zandi, chief economist at Moody’s Analytics, wrote in August. “Consumer spending has flatlined, construction and manufacturing are contracting, and employment is set to fall. And with inflation on the rise, it is tough for the Fed to come to the rescue.”
Here’s the big picture: President Trump’s tariffs have led to weakness in the jobs market while simultaneously driving consumer prices higher and many economists expect that trend to continue in the coming months. The Fed currently anticipates two more quarter-point rate cuts this year, but that may change if inflation continues to worsen.
Meanwhile, the economy may be closer to a recession than many investors realize. So, now is not the time to take big risks in the stock market, but rather to make prudent decisions (like building a cash position and avoiding overvalued stocks) to help mitigate any future losses.
