The Peter Zeihan Podcast Series - The Fire Hose of Chaos: Wait, The Recession Is Already Here?

Episode Date: April 23, 2025

What could have happened much, much further down the road (or even avoided given the right circumstances) is now in the headlines - the US is headed into a recession.Join the Patreon here: https://www.patreon.com/PeterZeihanFull Newsletter: https://mailchi.mp/zeihan/wait-the-recession-is-already-here

Hey all, Peter Zion here coming to you from Iowa. Happy Easter week. Happy Easter week. Happy Easter week. Anywho, a lot of you have written in to ask whether I think we're going to be in a recession and why. Short answer is, oh yeah. First, the caveat. When the United States was making its presidential transition back in January,

pretty much all of the signals for consumption activity, for industrial activity, for government activity. We're all green. And I mean to suggest there weren't some complications in there, some things to kind of keep an eye on. But we were in the middle of an economic expansion. There was no reason for expect that to change. But the policies of Donald Trump have been so erratic, so consistently, ironically, that business confidence has collapsed. And the United States is now in a situation where it is dealing with regulatory and geopolitical risk, which is something that business communities hate. On top of that, you have the tariffs where in the last six weeks, you're we've had 92 tariff policies, which make it impossible for anyone, business or consumer,

or even state and local governments to plan. So we've seen everything freeze up. And this is definitely going to cause a recession and a rough one and one that is completely unnecessary. So let's just kind of go through the four categories of where the growth comes from. First, government. This is actually the one I'm least concerned about. Despite everything that Doge has done with firing people, it turns out that the president doesn't have the authority, to fire most federal workers, neither does the Office of Management and Budget, and certainly Doge, which doesn't even have a congressional mandate. Instead, every department in the federal government does have a federal mandate and has congressionally mandated activities. So you can't fire

these people without congressional activity. So everything that Doge has done is pretty much already been unwound, the total budget savings in the low double digits of billions, and 90% of the workers have already been rehired doesn't mean that they won't be fired. Now the Trump administration in kind of round two is actually doing it the right way, going through the cabinet secretaries and getting legal structure from Congress for the reductions, and that will work. But that won't manifest this quarter and probably not next quarter. So what that means is even with the federal government being in chaos, the spending is still happening. So we're getting none of the functionality of government, but all of the cost of government. And from an economic point of view, that is a slight

negative, but not a big one. So government's kind of a non-factor right now. Next up is industrial spending, primarily on construction of new industrial plant. Now, in calendar year 2023 and 24, we were setting records every single month, and it all came to a screaming halt on the first of March of this year because of all the changes in the regulatory structure programs and because of all the chaos with the tariff policy. No one knows what the cost structure is any longer to build in the United States, and so no one is building in the United States. We have already had a longer stretch of zero industrial construction at any point in the United States since World War II. Now, that is only about 10% of the economy, but it's at a huge drag right now. Next up is manufacturing.

Primarily the problem here are tariffs on Canada and Mexico, which are coming in and out and changing on a regular basis, just like with everything else. But it's really hit things like auto spending. Your average automotive has 30,000 parts. And on par, all of the parts basically go back and forth and back and forth and back and forth across the borders to whichever one of the three NAFTA partners do the best. And on May 2nd, we don't simply have tariffs on finished cars. We have it on all of those auto parts. And so we're looking at the average cost of the vehicle going up by $12,000 to $20,000 if it's made in North America. And that is going to be crushing.

So with the existing tariff that we have right now that was implemented on the first week of April, that was already enough to trigger manufacturing recession in the really heavily auto-committed places like Tennessee, Kentucky, Michigan, Indiana, Ohio. and what we're going to see in the first of May is that will spill out to the other 25 states that are big into transport technology. And that's everybody from Washington to Texas to South Carolina. So then we get a manufacturing recession. That's another 15 to 20 percent of GDP. And then finally there's consumption, which is the big boy.

Three stories here. First of all, Trump says we're going to get, I recall, territorial tariffs very, very soon. In fact, by the time you see this video, it might have already happened. For the bottom quintile of the American population, one third of income is spent on food. So that immediately is enough to translate into a consumption recession for the poor and especially poorer parts of the United States, such as the deep spout or some parts of the Rocky Mountains. Second, the wealthy. Most of their consumption is tightly correlated to what's going on with the stock market. And that's

been a shit show for the last couple of months. So all of a sudden, the people who have the highest amounts of capital are probably going to be drawing back. And third, the tariffs, at the time of this recording, we have a 145% tariff on China, which is where most of our electronics and consumer goods come from. So you throw that on top of what everyone would normally purchase, and you get a consumption-led recession across the entire system very, very quickly. Now, the end goal here, of course, of the Trump administration's policies are to re-expand the industrial footprint in the United States and get back into manufacturing in a big way. But that takes a lot of things like steel and aluminum copper, and we now have tariffs on all

of those things. So building out this industrial plant will be very, very expensive. And if everything goes the way that Donald Trump says it will, we won't see the first output from these new factories within two years. which means that this transition period, best case scenario, according to Trump's words himself, is two years of inflation and recessionary activity. That's assuming that he's made the plan perfectly. He hasn't.

And that assumes that he's right about what he's doing. He's not. So yes, recession probably starting formally, statistically, in the second quarter, certainly in the third, and lasting a lot longer. than it would have ever needed to.