President Donald Trump’s long-awaited tariff plans officially arrived on “Liberation Day,” sending stock markets into a meltdown on Thursday as tariff rates climbed to their highest levels in almost a century.
Tariff-induced volatility has done sizable damage to portfolios, but the worst economic disruption is yet to come, according to Bob Elliott, founder of Unlimited Funds and a former executive at the hedge fund Bridgewater Associates.
Left unchecked, Trump’s policies are putting the US economy on track for a recession, Elliott believes.
Going into 2025, investor exuberance was sky-high as markets anticipated tax cuts and deregulation to turbocharge asset prices. Elliott was skeptical of this optimism and warned of a 20% stock slide in the first half of 2025.
A more severe stock market crash later this year is looking increasingly likely, and Elliott sees several looming trouble areas for the economy.
‘Totally implausible’ budget plans
One theory on Wall Street is that Trump is looking to use tariff income to pay for an extension of the Tax Cuts and Jobs Act. Trump could be front-loading his most unpopular tariff policies to get the short-term economic pain out of the way early on and pave the way for pro-growth measures, such as tax cuts and deregulation.
However, Elliott isn’t buying it: “It’s totally implausible that tariff-related income would be sufficient to offset the tax cuts. The current scoring of the tax cut extension is about $5 trillion over the next 10 years, and getting that magnitude of tariff-related income would require an implausibly high level of tariffs to be implemented by the administration,” he told Business Insider.
Trump has claimed that his tariffs would raise $6 trillion in the next decade, but Phillip Magness, an economic historian and Independent Institute Senior Fellow, thinks Trump needs to check his math.
“Trump’s estimate assumes current levels of imports will remain stable, but the reality is that import volume will decrease, meaning less revenue is collected. Best estimates seem to suggest it would only raise half of what they’re claiming,” Magness told BI in an email.
Tax cuts won’t save the economy
Don’t count on a renewal of the Tax Cuts and Jobs and Act at the end of 2025 to provide a lift to the market, Elliott said. Even if the tariffs did pay for a tax cut extension, it still wouldn’t be enough to meaningfully stimulate the economy.
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“The problem with the tax cuts is that it’s just the extension of the existing law, which means that it has no incremental positive benefit on growth, and so it’s simply avoiding what would have otherwise been a massive tax hike,” Elliott told BI.
Trump has promised to get rid of taxes on Social Security and tips, but the likelihood of that coming into fruition seems low: “We haven’t seen much congressional support for those efforts in the budget that was passed recently,” Elliott said.
Job market and economic weakness
As DOGE layoffs and funding cuts continue, expect economic data to weaken and sentiment to sour further, Elliot said. Theoretically, savings from DOGE could also help fund tax cuts, but the side effects could cause some serious damage.
“The new administration is planning for something like a third of federal government employment being cut, which would amount to something like 800,000 jobs,” Elliott said. That’s around six months of baseline employment growth, which would create a serious drag on the labor market.
Despite Trump’s claims that tariffs will spur domestic job creation, economists aren’t enthusiastic — if tariffs threaten company margins, layoffs could tick upwards.
“Once you turn the jobs machine negative, turning it back around again is not an easy task, especially when it’s rooted in a weak equity market,” Steven Blitz, the chief economist at business intelligence firm GlobalData, told BI.
It doesn’t help that consumer sentiment has dropped steeply in recent months. The University of Michigan Consumer Sentiment Survey revealed that consumers are bracing for inflation levels of 5% over the next year. In March, the index dropped to its lowest levels since 2022.
If Trump doesn’t back down on his tariff policy, consumers will face price increases and pull back on spending. Decreased federal spending on transfer programs as a result of DOGE is also likely to reduce consumer demand, according to Morgan Stanley.
Going forward, Elliott is keeping his eye on economic indicators like retail sales and PCE data to assess the health of the economy. He’s concerned that aggressive tariffs, budget constraints, and DOGE layoffs could create a perfect storm for an economic downturn.
“That combination of policies, if fully pursued over the course of the next year, risks driving the US into a recession,” Elliott said.
