The Trump fire is burning on Wall Street

American consumer sentiment is plunging, consumers expect inflation to surge, and the US sharemarket is tanking. All this is occurring before this week’s “Liberation Day” when President Donald Trump will reveal his “reciprocal” tariffs.

The US sharemarket fell 2 per cent on Friday – it’s down more than 9 per cent since Trump announced his plan for reciprocal tariffs in the middle of last month – with the tech-heavy Nasdaq market down 2.7 per cent and the “Magnificent Seven” mega-tech stocks down 3.5 per cent.

Wall Street appears jittery on the outlook for the economy in Trump’s second term. Credit: Getty Images

The already jittery market’s end-of-week sell-off on Friday was a response to hotter-than-anticipated inflation data and a University of Michigan survey which showed a 12 per cent fall in the index of consumer sentiment in March to its lowest level since 2022, and an 18 per cent fall in expectations of the economy’s future.

Those surveyed expected inflation to reach 5 per cent over the next year and be more than 4 per cent over the next five years. Two-thirds of them expect unemployment to rise over the next 12 months.

A survey of US businesses by the Conference Board, a business membership group and think tank, this week showed that the index reflecting their short-term expectations for income, business and labour market conditions fell 9.6 points from February to 65.2 – the worst result since 2013. A reading below 80 has historically signalled an impending recession.

Most US business economists have been revising down their expectations of US economic growth this year from an original consensus of GDP growth of about 2 per cent. Some major investment banks’ forecasts are below 1 per cent.

The Federal Reserve Board’s preferred measure of inflation, the personal consumption expenditures index, which excludes volatile food and energy prices, rose 2.8 per cent last month compared with February last year, and was up 0.4 per cent on the January reading, driven by increases in the prices of everyday items.

With consumers and businesses increasingly anxious, inflation remaining stubbornly high and well above the Fed’s 2 per cent target even before the core of Trump’s tariffs plans are unveiled, the risk of stagflation – falling growth even while inflation remains high – is rising. Without a material fall in the inflation rate, the Fed will be forced to keep interest rates on hold.

Then, of course, there are the Trump tariffs.

Last week, the president announced a 25 per cent tariff on all imported vehicles, and while he said at the weekend that he “couldn’t care less” if carmakers raised their prices, US consumers are going to care if their new small car is now several thousand dollars more expensive or their new SUV costs them what industry analysts have estimated could be $US10,000 to $US15,000 ($15,300 to $23,800) more.

While Trump said the tariffs would force Americans to buy American-made cars, the auto industry and its supply chain are highly globalised, and it would take years for US and foreign car companies to build the plants in the US that could produce the volume of vehicles now imported.

He has, of course, already imposed a 25 per cent tariff on imports of aluminium and steel, a similar rate on imports from Canada and Mexico, a doubling of the tariff on imports from China to 20 per cent (while threatening more) and mooted tariffs on copper, timber and pharmaceutical imports and other sector-specific measures.

Now, on Wednesday in the US, he’ll announce the reciprocal tariffs.

Ostensibly, those are supposed to simply match the tariffs imposed on US exports by the countries involved, but Trump and his economic team have suggested they will take into account non-tariff barriers to US exports and referred to the use of value-added taxes and digital services taxes within Europe and elsewhere.

They are also looking at issues such as product safety, local content requirements and other non-tariff measures such as Europe’s regulation of digital technology, where America’s tech giants have attracted multibillion-dollar fines, or Australia’s News Media and Digital Platforms Mandatory Bargaining Code.

Trump sees tariffs as a zero-sum game, with a winner and a loser determined by trade surpluses and deficits. In reality, they are a game where no one wins.

While there are some exceptions (notably India), most of the world’s trade attracts minimal, if any, tariffs. It is only if the definition of reciprocity is stretched to include non-trade measures – with massive intrusions into the domestic economic and social policies of other countries, including America’s closest allies – that Trump’s tariffs will have material effects or raise material amounts of revenue.

Trade hawk and White House aide Peter Navarro told Fox News on Sunday that the new tariffs would raise more than $US6 trillion over the next decade with the tariff on auto imports, which goes live on Wednesday, generating $US100 billion a year.

If that were accurate, given that Trump’s tariffs will be paid by importers – not the exporters – and that most of their cost will ultimately be borne by US consumers, it would be the biggest peacetime tax increase in US history.

Trump’s tariffs are set to send car prices surging in the US.Credit: Andrew Harrer

There is speculation that the initial round of reciprocal tariffs will be imposed on what Trump’s Treasury Secretary, Scott Bessent, has labelled the “Dirty 15”, or the 15 per cent of America’s trading partners with the largest trade surpluses with the US. China, the European Union, Mexico, Vietnam, Taiwan, Japan, South Korea, Canada and India head that list.

The rest of the world could be dealt with later or by applying Trump’s original plan of a universal baseline tariff.

Whatever form they take, and whether their direct cost is as substantial as Navarro claimed, they will be very disruptive to US and global supply chains, negative for US and global growth and, for the US and economies that retaliate, inflationary.

Trump sees tariffs as a zero-sum game, with a winner and a loser determined by trade surpluses and deficits. In reality, they are a game where no one wins, albeit some will lose more than others.

America’s trade deficit is driven more by macro factors – a dearth of domestic savings relative to investment and consumption – than by predatory actions of others.

It is doubtful that anything Trump does will materially shrink America’s trade deficit unless it results in a substantial reduction in US living standards and an America that lives within its (diminished) means. He might inadvertently achieve that.

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