Will Trump's tariffs cause a recession? 7 ways to protect your money
C. A. Bridges- President Trump imposed new tariffs on nearly every country.
- Economists predict a recession due to the tariffs, leading to higher prices and unemployment.
- Experts advise reducing debt, increasing savings, and diversifying investments to mitigate the impact.
Stocks plummeted Thursday morning, April 3, with the Dow Jones down more than 1.500 points and the broader S&P 500 dipping nearly 250 points as the markets reacted to President Donald Trump's announcement Wednesday that he was imposing new tariffs on nearly every country in the world.
If they continue as promised — 10% on all U.S. imports, higher tariffs on the 60 countries that contribute most to the U.S. trade deficit — economists expect the country and possibly the world to plunge into a deep recession leading to higher prices, stagnant wages and unemployment.
While Trump and his advisers have been steadfast in promising this will all lead to a stronger economy, these moves, along with the Trump administration's mass firing of great swaths of federal workers around the country, the resultant reduction in service, the elimination of funding to U.S. aid programs and scientific research programs and Trump advisor Elon Musk's threats against Social Security all can have devastating effects on inflation and consumer and investor confidence.
"THE OPERATION IS OVER!" Trump posted to his social media site, Truth Social, on Thursday, April 3. "THE PATIENT LIVED, AND IS HEALING. THE PROGNOSIS IS THAT THE PATIENT WILL BE FAR STRONGER, BIGGER, BETTER, AND MORE RESILIENT THAN EVER BEFORE. MAKE AMERICA GREAT AGAIN!!!"
What happens now? And what should you do about it?
How can I protect myself from a recession?
The hardest part of a recession is uncertainty about your financial situation, now and in the future. Investopedia.com and economists suggest the following tips to get through a recession.
1. Get rid of high-interest credit cards and loans
This is easier said than done, of course, but even more important than building up savings is getting rid of excessive debt that's racking up high interest rates. The average credit card interest rate is a whopping 24.2%, according to LendingTree.
Throw any extra cash at credit card payments, move the balance to a new card with a 0% APR offer, or transfer it to a home equity line of credit, or even a personal loan that will have substantially lower interest rates.
2. Build up your savings and plan ahead for major expenses
If it's an option for you, put a set amount of monthly income into a high-yield FDIC-insured savings account.in a high-interest. You also may want to keep cash handy for emergencies. If you have plans for a vacation or big expenditure, start saving now rather than paying for it on credit later.
Many finance experts say Americans should stockpile enough emergency savings to cover three to six months of expenses or roughly $33,000, on average, according to Investopedia.
You may also want to start paying attention to any preventative medical care you can get now or any early vehicle or home repairs you can have done. By the time they're a problem, they will cost a lot more.
3. Live within your means
Check your budget and adjust it to avoid running up credit card bills or other debt.
If you are a two-income family, see how close you can get to living off just one person's income to both help you save money quickly and to be ready if one of you becomes unemployed.
4. Find extra income
More jobs mean more job security, and the more streams of income you have, the less you'll be affected if one or more dry up.
5. Invest for the long term, don't sell low
If you don't plan to sell your current stocks, a temporary recession won't affect you since the market will eventually rise again. If you have the means, it might even be a good time to buy more as prices fall.
But make sure that as you reach retirement age that you have enough money in liquid, low-risk investments to retire on time.
6. Diversify your investments
If your money is in different places, you run less of a risk of losing it all. Try to build a portfolio of investments that aren't related, so that when one is up the other is down, and vice versa.
7. Keep your credit score high
Pay your bills on time, keep your oldest credit cards open and keep your ratio of debt to available credit low and keep your credit score up. When credit markets tighten, people with excellent credit will have the best chances to get approved.
If times get tough, talk to your creditors and work out payment plans to keep your accounts in good standing.
What is a recession?
The definition is a little fuzzy, and recessions are often not declared until they've already been going on for some time.
According to the National Bureau of Economic Research, a recession in the U.S. is “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The nonprofit bureau's Business Cycle Dating Committee is the official designator of business cycles.
The unofficial definition of a recession many experts use as a rule of thumb is when the gross national product (GDP) drops two financial quarters in a row.
How does being in a recession affect me?
Indications of a recession often include:
- Higher prices, which contribute to a drop in consumer spending
- Declines in manufacturing and production due to rising material costs and a drop in consumer spending
- Drop in business investment as companies seek to save their money, which can lead to higher prices and drops in consumer spending
- Unemployment due to layoffs from lack of sales
- Stalled wages as employers freeze paychecks and bonuses
What are tariffs?
Tariffs are simply taxes imposed on foreign imports, generally a percentage of the price that importers pay. They are often used to encourage domestic production and reduce reliance on foreign goods by driving up the price of imports.
Who pays for tariffs?
Trump has repeatedly and inaccurately stated that other countries would pay for the tariffs. In fact, economists generally agree that consumers bear the brunt of them as importing companies pass the increased cost in the form of higher prices to maintain their profits or just to keep from losing money on every sale.
Tariffs tend to be regressive, raising prices disproportionately on lower-end versions of goods compared to higher-end counterparts, according to a 2024 study, which means lower- and middle-class families will be hit harder.
What's the difference between a recession and a depression?
A recession is a downward trend in the business cycle characterized by a decline in production, sales and employment. Recessions are common and can be very quick or last months or years. The U.S. saw drops after the collapse of the housing market in 2008 and during the first months of the pandemic shutdown in 2020, and the country recovered. But sometimes they spiral out of control and lead to a depression.
A depression is far worse. A depression is a widespread, extreme recession that lasts longer and causes generational damage to the economy. The last one in the U.S., the Great Depression of the 1930s, saw the stock market crash, banks failing, and thousands of Americans out of work for over a decade.