The broadest index, the S&P 500, which includes 500 large corporations, fell almost 5%. The technology-heavy NASDAQ fell even more, dropping almost 6%. This was the biggest one-day drop since the COVID-19 hit the United States in 2020.

What set off the stock market sell-off was President Trump’s announcement of tariff increases the day before, which Trump named “Liberation Day.” Trump announced a minimum 10% tariff for almost all countries, and much higher tariffs for countries where the United States had large trade deficits. While Trump claimed that they were “reciprocal tariffs,” that is, based on other country’s tariffs, in fact they were calculated based on the U.S. trade deficit with each country.

These tariffs were piled on top of Trump’s previous tariffs. So, for example, China will now face the 20% tariffs from February plus 34% additional tariffs, for a total of 54% tariffs. This means that for every good that comes into the United State from China the importer will have to pay a fee equal to 54% of the price of the good. Trump’s 25% tariffs on imported cars also kicked in.

While Trump believes that the exporter pays the tariff, in most cases, the consumer will bear the brunt of the cost of the tariff through higher prices.

Even worse for the consumer, goods made in the United States that compete with imports will also go up in price. This is what happened during Trump’s first term, when he placed tariffs on iron and steel. While import prices went up 25%, domestic steel producers raised their prices on average 22%, preferring to make a quick buck than increasing production.

Trump also believes that higher priced imports will cause there to be more production in the United States. But his tariffs on iron and steel, and coming tariffs on imported car parts, increase the cost of production of goods using the tariffed goods. So, while there were small increases in production of iron and steel, leading to more jobs, the losses in industries using iron and aluminum for production were far greater, leading to an overall job loss.

This is even greater with Trump’s tariffs on imported automobiles. Over the last 30 years the auto industry has built plants across Canada, Mexico and the United States based on the no-tariff rules of NAFTA and now the USMCA [United States-Mexico-Canada Agreement] that Trump himself negotiated. But rather than moving plants to the United States, which would take billions of dollars and years of construction time, auto makers have started to shut down plants in Canada and Mexico on the belief that their cars cannot be sold with the 25% tariff. But parts for these plants are often made in the United States, so they can be shut down too. This is the case with Stellantis, which suspended production at plants in Canada and Mexico, leading to layoffs at their part plant here in the United States.

Another issue is that of retaliation and the costs to American workers and farmers. In Trump’s first term, he only tariffed about half of imports from China, but China’s retaliation by cutting off purchases of U.S. farm goods, especially soybeans, led the Trump administration to spend more than $20 billion on aid to farmers. This time, with Trump putting tariffs on virtually the whole world, the retaliation will be much greater and the cost in terms of lost business sales and workers’ jobs, will be much greater.

One of the impacts of Trump’s trade war is growing uncertainty among businesspeople, who are holding off hiring and investment decisions given the escalating trade war. For this reason, even mainstream economists are raising their estimates of the likelihood of a recession in the United States later this year. Factoring the damage to the economy caused by retaliation, the job cuts of federal workers, as well as terminating government contracts, it is more likely than not there will be a recession.

How bad could it get? Trump has threatened additional tariffs on semiconductors, pharmaceutical drugs, copper, timber and lumber, and more. He has also threatened more tariffs on countries that retaliate, countries that buy oil from Venezuela, countries that tax digital services by U.S. companies, etc. So rather than providing more certainty, “Liberation Day” marks the beginning of even more uncertainty.

With the Trump administration and their minions at DOGE going all out to cut spending, and with Republican majorities in both the House and Senate, it is very unlikely that there will be anything like the massive aid in 2008-2009 and 2020. Without federal spending, it is quite possible for the economy to continue to grind down, in a deep and painful recession.

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Behind the drop in the stock markets was the growing realization of the economic costs of Trump’s trade wars and the growing possibility of a recession. The worry is that Trump’s tariffs will lift import prices, causing inflation to go up and production to go down because of higher costs. This so-called “supply-shock” would be a (hopefully) milder version of the COVID-19 pandemic impact in 2020.

On Monday, the Canadian province of Ontario imposed a 25% surcharge on the electricity it exports to the United States in response to Trump’s tariffs. About 1.5 million households and businesses in the states of Michigan, Minnesota and New York use Canadian electricity. The Premier of Ontario also said that they could shut off electricity exports altogether if Trump escalated his trade war on Canada.

The same day, China’s previously announced response to Trump’s tariffs also went into effect. It consisted of 15% tariffs on chicken, wheat and corn and 10% tariffs on soybeans, pork, beer and fruit. China also limited purchases of Chinese goods by 15 U.S. companies and banned ten from doing business in China. These agricultural tariffs are both an attempt to hit back at U.S. farmers, which is one of Trump’s bases of support, and reflect the progress China has made in applying technology including AI, global positioning (what we call GPS, but China has its own system by Baidu), and drones to agriculture.

Further, Trump’s 25% tariffs on aluminum and steel for all countries are scheduled to go into effect on Wednesday. The tariffs on aluminum will hit Canada the hardest, as they are the single largest country exporting aluminum to the United States. In fact, Canada’s exports are about the same as total U.S. production of aluminum. While steel imports are only less than a quarter of total U.S. steel consumption, Canada is still the largest exporter of steel to the United States, with Mexico as number two.

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The S&P Purchasing Managers Index fell in February to 51.6, just above the 50.0 line where the economy is neither growing nor shrinking. The services part of the index actually dropped below 50, to 49.7, showing that the service sector was starting to slow. The “Trump Bump” of economic and financial enthusiasm has ended after just a month in office, as concern rose among businesses about the impact of his tariffs and deportations.

A separate report, on the sale of existing homes by the National Association of Realtors, saw sales fall by almost 5% in January, as compared to December of 2024. Interest rates have been rising. Trump’s proposed tariffs have led to greater expectations of higher inflation. Mortgage interest rates topped 7% in January, making home loans more expensive to pay off. While higher interest rates affect the demand for homes, as Trump’s deportation raids begin to reduce the number of construction workers, the supply of new homes will fall, pushing prices up even more and making them even less affordable.

The University of Michigan’s Consumer Sentiment Index fell almost 10%, to 64.7 in February, down from 71.7 in January. A big part of this was the rise in expected inflation over the next year, from 3.3% in January to 4.3% in February.

The largest outbreak of stagflation in the United States was in 1973 and 1974, when inflation and unemployment rose. Typically, these indicators move in opposite directions. The recession and rising inflation showed the post-World War II economic boom in the United States was over, and that the relative decline of the U.S. economy had begun. Today’s stagflation is a sign that the U.S. economic decline is accelerating. While Trump was largely elected because of widespread dissatisfaction with the economy, especially inflation, in fact, his policies were going to accelerate both the economy’s decline and rising prices.

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The stock price rout was led by Japan, where stock prices fell 12%, the worst day since “Black Monday” in October 1987, when U.S. stocks fell 22%, the worst one-day fall ever. A particular factor in Japan was that the Japanese central bank raised interest rates last week, causing a sharp jump in the value of the Japanese yen.

Back in the United States, the so-called “magnificent seven” of tech companies, including Alphabet (parent corporation of Google), Amazon, Apple, Meta (parent company of Facebook), Nvidia (maker of chip used in artificial intelligence applications) and Tesla have been leading the stock market higher for months.But on Monday, these stocks fell harder on average, as doubts about the profitability of AI joined with recession fears.

Falling stock prices are not a good predictor of a coming recession – in fact the biggest fall in October 1987 had little impact on the economy. But a sustained fall could affect spending by the wealthiest Americans, who own most stocks. As more and more working-class Americans have been cutting back on purchasing and turning to credit cards for necessities, wealthy Americans have kept up spending.

More worrisome is that many economic signs are pointing towards an economic slowdown that could lead into a recession. Claims for unemployment are on the rise. More and more credit card and car loan borrowers are falling behind on their payments. The manufacturing sector has been shrinking, albeit slowly.

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