Fear is the economy killer
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How worried about a recession are you? Yes, that's the big question. I'm on a scale of one to ten. I'm probably somewhere around a five or six now, which is way higher. If we had this conversation in January, I think I would have been like a two.

So it just shows you how much has jumped up. You can pick your favorite economist. I think JP Morgan put the recession odds at 40%. Larry Summers was at 50%. Goldman Sachs still pretty conservative around 20 to 25%. But everyone agrees the recession risks have really gone up. Tariffs, the stock market, doge cuts. Americans are getting bad vibes from the economy. But if consumers quit spending, a vibe session could turn into a real session.

I'm Jonquan Hill, guest hosting today's show. And all this is coming up on Today Explained.

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I'm Heather Long, an economic columnist at The Washington Post. Heather, I have a question. This is just something I've personally wondered. Maybe it's because, like, I was 18 in 2008, but, like, is there, are there, like, what will make me say, oh, girl, there's a recession and she's here? Like, are there things or you just got to wait and see?

That's a good one. Yes. Yes, there are. Traditionally, it's the unemployment rate jumping up a lot. People are keeping a close eye on the early signs of that. The other one that I'm keeping a close eye on is consumption, retail spending. And in particular, I've been watching the –

Normally very dull earnings reports from the companies, but I think the companies are being pretty explicit. What we don't know is potential consumer demand that's across the board, across based on how tariffs ripple across the economy, for instance. Although we can pass this cost to our business partners.

Higher prices to an already pressured consumer will likely impact our segment volumes and ultimate revenue and profitability. You know, they're not out there saying, you know, Trump this, Trump that, but they are saying pretty clearly we are ratcheting back our forecast for this year, particularly like a lot of the consumer facing places are really feeling it.

Let's get into the stock market first, because that's where we've seen some of the most dramatic change. Stocks went way up after Trump was elected, and since they've fallen dramatically. Why? What is going on? It's really been almost a one-to-one reaction to the tariff plans. ♪

Initially, there was the huge rally, this belief Trump's coming back. We're going to be in the boom time. He's talking about deregulation. We'll remove 10 old regulations for every new regulation. He's talking about tax cuts for everybody. They're in there. They're waiting for you to vote.

But then every single day since the election, he would mention tariffs. I always say tariffs is the most beautiful word to me in the dictionary. And not just in passing. It was this tariffs are beautiful, tariffs are wonderful, tariffs are going to revolutionize America kind of message. Because tariffs are going to make us rich as hell. It's going to bring our countries...

Business is back that left us. And for a long time, Wall Street didn't take that seriously. But February, early February, so a hit. And he puts those tariffs. Who does he go to first? Mexico and Canada. You know, that was not expected. So the market starts to go down early February. Trump pulls them off.

Then we kicked it to that crazy week in March, and it was just mind-blowing. Even for traders on Wall Street whose whole job is to be able to react in microseconds. This was just crazy. But we need to see fentanyl deaths decline. So that is the statistic that I'm most focused on. So are we looking at daily autopsy deaths? Like, how do we do that? How as a business do you figure out what that's going to look like and when it ends?

And so I think that's when Wall Street really started to say, wait a minute, our entire read on what Trump is trying to do with these tariffs is probably wrong. And we need to really take seriously that there could be some mistakes or that this trade war is going to be way bigger than we were estimating. And now, of course, we've kicked it to April 2nd is the new, oh my gosh, what's really going to happen day on these tariffs. And it will be Liberation Day because we'll be taking in

Large amounts of money for our country, and that's lower taxes and all of the things that are good. And jobs, a lot of jobs. American consumers changing their behavior in reaction to all of this? Oh, yes. Oh, yes.

And so two big things are going on. Number one is a significant number of people have been buying ahead of the tariffs. So you saw a bit of a splurge or a mini boom, if you will, and people trying to buy a car or trying to get their home improvements done.

basically before Trump took office and certainly by March 1st. And that's actually masking a lot of the pain that I think we could potentially see soon. I think the second noticeable thing that's different is

Look, people are very concerned about inflation and they're watching, you know, they are watching the egg price crisis. The average price for a dozen of eggs is double now what it was before this outbreak began three years ago. All right, guys, today is a day I know they are going to be $1.99 today. Oh!

They're starting to see and get notes from retailers or from electric utilities warning them that as these tariffs go into place,

You know, bicycles are going to cost more. Your utility bill could come up if you get your energy partly from Canadian hydropower, Canadian oil that's coming across the border. So I think people are very tuned into this and can really start to see it tangibly. Yeah. What impact has we seen on jobs? Are people concerned about that at all?

Yeah, and this is so different than before. Partly it's tariffs, but even more so, I think the Trump administration, particularly Elon Musk, did not understand the psychology of this doge thing.

Today, yet more examples that the Social Security Administration is in turmoil because of the cuts that Elon Musk and Doge are making. The Trump administration's slashing of the federal government workforce is hitting home far beyond the nation's capital. Some 80 percent of the federal workforce is outside D.C. You know, they're so eager to show that they are cutting all of these federal jobs that

But what it's really doing is freaking Americans out, even if you don't work in a federal government sector. I've heard from daycare workers who suddenly say, wait a minute, if a bunch of people in my area lose their job, does that mean they're not going to take their kid to daycare anymore? And so I lose my job. Or restaurant workers thinking the same thing. Wait a minute, are all these people not going to come out for their birthday dinner anymore? And so my job's on the line or my hours get cut back. ♪

What's different now than what I was seeing even a couple of weeks ago is when you look at these consumer sentiment surveys that are really in the dumps now, you know, people are very afraid. People, this is a vibe session. Trump is in a vibe session, let's call it. People, when they're asked, do you think unemployment will go up in six to 12 months? Or do you think you will financially be worse off? There's been this crazy spike in people who think unemployment

they or someone they know is going to lose their job very soon.

and that their finances are going to be worse off. And that was different. Under the Biden administration, a lot of people gave very poor grades to the economy. They didn't like the economy. They were very worried. But when they were asked, are your personal finances going to be better off in six to 12 months? The vast majority of people would say yes. We did it. We did it, Joe. And now, what do you do? What do you do if you think there's going to be a recession or you might lose your job, right? People are pretty rational about this. And of course,

They stop booking vacations. They stop going out to eat as much. You know, they start cutting back. You can see it in the data where at places like an Applebee's or an Olive Garden, you know, people are not ordering appetizers and desserts anymore. You know, they're really...

pulling back or they're simply not going at all. And these earnings calls for these types of chain restaurants are talking about people who earn $75,000 or less just aren't coming anymore. Our teams responded by introducing limited time offers and value driven promotions to attract cost sensitive consumers. And so I think people are a little bit tapped out. The savings is run down. Now they're fearful and now they were already starting to turn a little bit and belt tighten. And now it's like extreme.

Why does it matter that people are afraid? Does that have an impact on the economy? It does if the fear turns into action. And we're at the early edges of that. And so we just saw in March this wave of all the airline companies come out and say bookings are really weak so far this year. You know, they can see that people are not

eager to book vacations like they were in the past few years. And so I think, you know, is that that probably there's an easy potential for that to continue to build. And the question is just, are we going to slow down enough to be in a recession? So the way you're describing the U.S. economy makes it sound like we really depend on buying stuff. Does it have to be that way?

I mean, the answer is no. Obviously, a number of other countries around the world are much more economies dependent on producing things and exporting them. That was certainly China's model and to a certain extent, the German model, so much less reliant on consumption.

So right now, the U.S. is 70% of our economy is consumption-led, is people going out and eating out and purchasing those soccer balls and purchasing trips to Disney World. And I think the Trump administration has been making this argument. The Treasury Secretary Scott Besson has been saying, you know, look. Access to cheap goods is not the asset.

is not the essence of the American dream. And that's why the Trump team, if you want to try to give them some sort of credit for having a strategy here, I think the best I can tease out is they honestly believe that the U.S. should follow the model of Argentina and President Javier Millay. Reducing the Argentine state to its minimum and at all costs. This is the motto of Javier Millay.

In six months, he has already cut 30,000 civil service jobs. The situation in Argentina is critical. The changes our country needs are drastic. Argentina's a mess, but what I mean by that is have a quick recession or a quick downturn and then use that to come out on the other side and then really invest and grow the private sector, specifically the manufacturing sector.

You know, there's a million questions. Can we do that? Is it achievable? How much can we really bring back? How many jobs could really be brought back? But that's the best case version of the plan. Coming up, how Trumponomics is making Europe great again. Support for Today Explained comes from Udacity.

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And it turns out things are going kind of okay on the other side of the Atlantic. So we brought on Financial Times Brussels Bureau Chief Henry Foy to get into the Europe of it all. They're going better than perhaps people feared they really would under Trump.

The euro's up in the last six months. You've got a lot of money flowing into the stock market, specifically in defense stocks. EWG, the German ETF, finally, after 20 years, making a new high this week. One of the things that might be an unintended consequence of all of Trump's rhetoric

Well, this is probably not good for the US. European defense stocks soar. There's a certain amount of positivity coming back to Europe as

The feeling that by becoming more independent of the US and finding more sovereignty, that there could be actually a really good growth story here. That contrasts massively with this fear from six months ago, which was that when Donald Trump became president, there would be this huge backlash against Europe and the European economy would get even more squeezed than it is already.

Yeah, we've been talking about the American economy since Trump's election back in November, but I kind of want to rush him on this. I want to get all the different perspectives. How has this played out from the European perspective? I mean, it was all really about expectations. There was this fear, of course, of the trade war and that these enormous American tariffs would really smother European exports. And, you know, regardless of the politics, Europe relies a huge amount on American trade. And I think that's a big part of the

The coronavirus pandemic hit Europe really badly. It found itself cut off from global supply chains, as did many countries of the world. But for Europe, it was quite a big crunch. You also then, of course, the Russian invasion of Ukraine. Russia was the biggest supplier of energy to the EU. So that conflict, the stance that the EU took, which was to stop buying Russian pipeline gas, pushed up energy prices to a level that was around four times

US average gas prices. So the European economy took a massive hit from that. Europe has really struggled to come out of that funk. And then yeah, in the last few months, there's been this kind of more optimistic rhetoric coming out of European capitals to say, okay, if the Americans are going to leave us by ourselves, we're going to have to do this and actually put some money behind our economy and get things moving. You just described some pretty huge structural problems.

What exactly changed in this short amount of time? We are very happy that he has come back to Munich and we are very much looking forward to his speech. Please welcome Vice President J.D. Vance.

It was a pretty amazing moment. The Munich Security Conference, traditionally kind of the most transatlanticist kind of festival of defense and security. Traditionally, the U.S. vice president comes, gives the keynote speech. And for everyone

every single year that people can remember, they've come and they've talked about the importance of the bond with Europe, the undying love for Europe from America, the need to protect European democracies, et cetera, et cetera. Of course, this year, J.D. Vance turns up and gives a pretty brutal speech

The threat that I worry the most about vis-a-vis Europe is not Russia, it's not China, it's not any other external actor. Filled with criticism of Europe essentially tying American support to Europe, to Europe's social values. And what I worry about is the threat from within. The retreat of Europe...

from some of its most fundamental values, values shared with the United States of America. People were shocked. It wasn't a sort of case of, this is, he's not being nice to us. It was, this is completely out of order. And the fact that it was done by a US vice president at the Munich Security Conference really struck home that this is a very different administration and that if Europe thought there was a way that maybe reality and rhetoric wouldn't match, that's now out the window. This is now action stations. We need a plan and we cannot rely on America anymore.

So, you know, Europe gets that Vance-shaped wake-up call in Munich. And, you know, I also imagine that Trump's take on the war between Russia and Ukraine has also shaken up the continent. What do you do when that happens? What's the solution that they've come up with? You do what you should have done for the last 70 years, which is start to spend on your own defense so that you don't rely on America anymore. ♪

So there's one statistic really, and that is what Germany has done in the last month. The newly elected Chancellor of Germany, Friedrich Merz, he's not yet installed as Chancellor, but he is the leader of the largest party and they're in coalition negotiations now and barring some enormous crisis, he will be Chancellor. The night of his election, he said, we can no longer rely on America. My absolute priority will be to strengthen Europe as quickly as possible.

so that step by step we can really achieve independence from the United States. And...

A few days later rolled out this extraordinary spending plan of a trillion euros, which comprises of two big parts. The first is half a trillion euros spent on defense. And the second was a move to essentially de-link defense spending from debt spending, saying it doesn't matter how much we borrow for defense. So just to put this into perspective, the sort of scale of the German pivot on this, the Germans have a word, Schuldspende.

It means debt and it also means guilt. They have linked these two ideas to the extent that having a balanced budget is sort of part of their national psyche. So for Merz to come in and say this doesn't matter anymore, what matters is defending Europe, is a huge moment, not just for Germany, but for all the other countries who look at them and say, wow, if they're getting serious, then we should too.

And there's real world benefits here, right? The German car industry that used to be sort of the symbol of European industrial greatness, exporting all around the world, it's gone through some really hard times recently with high energy prices, with competition from China, with this looming trade war. You're now seeing kind of mothballed

car factories being converted or discussions about converting them into tank factories. Volkswagen is exploring a significant pivot, potentially transforming its Osnabrück plant into a military production hub. With car sales slowing, CEO Oliver Blum is open to defense manufacturing, aligning with Germany's increased military spending. There are real-life things happening.

And at given time, if this all plays out the way the Europeans hope, you could have a much better European economy as a result of this huge defense boom. Are we going to see a real change to the way European lives look? I mean, it's often pointed to Europe as look at the social services they have look at, you know, health care, all these different things is are we are we getting to the end of that? Is that going to no longer be the standard in Europe?

That's an excellent question. And it's really kind of step two of this whole process. You can spend the money, you can build the arms factories, you can kind of plan for a European defense strategy that doesn't involve the United States Army. But are your societies going to keep up with you? Are they going to keep voting for you while you do that? And for me, I see three big pressure points. The first is just higher taxes in a very simple sense.

If they're going to be spending more money, they're going to be borrowing more money, they're going to have to take more money in in taxes. And that's a conversation that hasn't really happened yet in a lot of European countries. You know, whenever France talks about increasing the pension age, there are mass riots all across France. I mean, this is a really big problem for a lot of countries. The second is

conscription, national service, you're going to need a lot more troops. You're going to have to start talking to societies about how many more people are they willing to put in harm's way. And the third thing is just societal preparedness. I mean, this is a whole societal shift.

to think we could have war back on the European continent again, you know, for the first time since 1945. And societies that have got used to being at peace got used to really living and prospering in this peace that to a certain extent was provided by America

might not be here much longer. We might need to get back into a war footing, thinking about conflict, thinking about crisis as an everyday part of our lives. So with all of these changes coming about, are we sure the Europeans are going to stick together? I mean, when it comes down to actually writing these checks,

Are countries going to follow through? It's a great question. It's a question that really can only be answered by the leaders of these countries. What we are seeing in the last few weeks is this sort of coalition of the willing. It's been dubbed coming together. It's being led by Sakhir Starmer, the Prime Minister of the United Kingdom, and Emmanuel Macron, the President of France. They've been meeting regularly as leaders, sort of 12 to 15. And these are the big countries, Italy, Denmark, Spain, Poland, meeting and discussing how to do this.

So far, the unity has held. The big question is going to be about money. But ultimately, there is no choice. The Europeans stick together and sort of defend themselves against Russia and any other threat that they might have, or they divide and they're picked off one by one.

And so if you have this situation where the European defense industry, the defense industrial complex, which in many ways has suffered as a result of America being so dominant in Europe in the defense space and therefore providing all the best weapons at high prices built in America, if you can build a European one,

that's joined up that isn't 27 different countries competing. The economies of scale from that are enormous. And then all of the beneficiaries that the American economy, for example, gets from its defense industry, I'm thinking of research and development, innovation, education, skills that benefit other parts of the economy, dual-use products, this will spill it into Europe. This is the thinking behind, okay, if we can use defense as a big push here,

to increase our competitiveness or economic clout, that can spill over into other areas. If you can get the reinvestment right, get the orders in, make it work, it could be a huge driver for the entire economy at large.

Henry Foy, Brussels Bureau Chief for the Financial Times. Our show today was produced by Miles Bryan and Carla Javier, edited by Jolie Myers, engineered by Andrea, Kristen's daughter, and Patrick Boyd, and fact-checked by Laura Bullard. I'm Jonquan Hill. This was Today Explained. And hey, if you find me kind of endearing, you're in luck. I host a podcast called Explain It to Me. New episodes drop Sundays, right here in the very place you're listening right now.

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