Why One Veteran Economist is Doubling Down on His 2025 Recession Call After Trump’s Victory

Veteran economist Steve Hanke is maintaining his prediction that the United States will enter a recession in 2025, a forecast he’s held for months. The economist, who teaches at Johns Hopkins University, bases his view on troubling trends in the money supply and potential headwinds from economic policies tied to former President Donald Trump’s recent election victory. Here’s why Hanke believes a recession is looming and what factors are influencing his perspective.

Key Concerns: Shrinking Money Supply

Hanke points to the contraction of the M2 money supply—a measure of the money circulating in the economy—as a key indicator of an impending recession.

• Historical Precedent:
  • M2 shrank from mid-2022 to March 2024, a rare occurrence that has only happened four times in the past century. Each instance preceded a recession.
  • While M2 started to grow again in 2024, the 2.47% year-over-year increase at the end of September is still well below the 6% growth rate Hanke believes is necessary to sustain healthy economic activity and inflation levels.
• Economic Impact:
  • “The fuel for the economy, to make it simple, is the money supply,” Hanke said in an interview with NYSE TV Live.
  • Significant changes in the money supply often result in notable shifts in nominal GDP, making this trend a critical concern for economic health.

The Role of Trump’s Economic Policies

Hanke argues that Trump’s protectionist policies, particularly tariffs, could exacerbate economic challenges.

• Impact of Tariffs:
  • Trump has proposed steep tariffs on U.S. imports, which Hanke likens to imposing a sales tax.
  • Higher import costs could reduce consumer demand, slowing economic activity further.
  • “If you put tariffs on imports, it’s like putting a sales tax on those imports. And if you put a sales tax on something, what happens? People don’t demand as much of it,” Hanke said.
• Potential Inflationary Effects:
  • While Trump has argued that his policies will lower prices for Americans, economists warn that wide-reaching tariffs could increase costs, fueling inflation and reducing consumer purchasing power.
  • During Trump’s first term, tariffs did not lead to significant inflation, but his new plans are more expansive, raising concerns among forecasters.

Why Some Economists Disagree

Despite Hanke’s recession warning, many economists maintain a more optimistic outlook for the U.S. economy.

• Soft Landing Predictions:
  • Forecasters expect inflation to continue moderating toward the Federal Reserve’s target rate.
  • Real GDP is projected to grow by 2.5% in the fourth quarter of 2024, according to the Atlanta Fed’s GDPNow reading, suggesting steady economic momentum.
• Economic Growth Indicators:
  • Consumer prices rose 2.6% in October, slightly above expectations but within a manageable range.
  • Solid consumer spending and business investment continue to support economic growth.

Factors That Could Challenge Hanke’s Forecast

While Hanke remains steadfast in his recession call, several factors could challenge his outlook:

1. Resilient Consumer Demand:
   • The U.S. economy has shown remarkable resilience, with consumer spending remaining robust despite rising interest rates.
2. Potential Economic Stimulus:
   • Should economic conditions deteriorate, policymakers might introduce stimulus measures to counteract a slowdown.
3. Global Economic Recovery:
   • Strengthening global markets could offset domestic challenges, providing a buffer against a recession.

Hanke’s Perspective on Recession Risks

Hanke emphasizes the role of the money supply as a leading economic indicator, noting that any significant deviation can have far-reaching consequences.

• Slow Growth Warning:
  • The current rate of M2 growth suggests the economy may not be expanding fast enough to avoid a downturn.
  • A shrinking money supply, combined with potential trade disruptions from tariffs, could create a perfect storm for a recession.

Conclusion: Preparing for Uncertainty

Steve Hanke’s 2025 recession prediction is rooted in historical trends and economic indicators, particularly the money supply and the potential effects of Trump’s policies. While many forecasters anticipate a soft landing, Hanke warns that the combination of a contracting money supply and protectionist trade measures could weigh heavily on the U.S. economy.

Whether or not a recession materializes, the outlook underscores the importance of closely monitoring economic trends and preparing for potential challenges in the years ahead.