US Fiscal Outlook: Millstein Sees "Fiscal Disaster" if Recession Hits (May 20, 2025)

US Risks ‘Fiscal Disaster’ If Recession Hits, Says Jim Millstein (YouTube link)

In the above interview, Jim Millstein highlights economic concerns and uncertainties surrounding U.S. fiscal and trade policies in 2025. 

Key points include:

• Monetary Policy Shift: Investors now expect two Federal Reserve rate cuts in 2025, down from three, reflecting a cautious economic outlook. The Fed Chair is closely monitoring Treasury and White House policies, particularly on tariffs, which could drive short-term price increases and affect global economic activity.
• Tariff Impacts: Proposed 25% tariffs on major trading partners like Mexico and Canada, despite the USMCA framework, are causing market disruptions. Companies like Ford report chaos and rising costs, with prices already increasing due to suppliers anticipating tariffs. This could elevate inflation metrics (CPI, RPI, PKI) in 2025, though the effect may stabilize by 2026.
• Fiscal Challenges: The U.S. federal debt-to-GDP ratio is at 1:1, with a 7% GDP deficit growing faster than the economy (2-3% growth). Proposed tax cuts (e.g., no tax on tips, Social Security, or overtime) could add $2-3 trillion to the debt over a decade, exacerbating fiscal strain. The administration’s plan to reduce the deficit to 3% relies on optimistic 3% GDP growth and deregulation, but these face delays and uncertainties.
• Economic Uncertainty: Tariffs, potential retaliatory measures, deregulation delays, and mass deportation policies create uncertainty, impacting small businesses, M&A activity, and IPOs. Retaliatory tariffs could slow growth, reducing tax revenues and increasing recession risks.
• Corporate and Consumer Stress: High interest rates are straining companies, especially in consumer discretionary sectors, as they refinance debt at higher costs. Bankruptcy filings are rising, though mitigated by private credit and creditor workouts. Consumer resilience is supported by credit availability, but declining bank balances, slowing wage growth, and rising inflation-adjusted debt signal growing pressure.
• Policy Execution Challenges: Deregulation and supply chain reorganization are multiyear efforts, unlikely to deliver immediate growth. The administration’s growth strategy hinges on deregulation and tariffs spurring domestic investment, but short-term disruptions and global reactions may hinder progress.

Summary

In summary, while the administration aims for pro-growth policies through tax cuts and deregulation, tariffs and fiscal deficits pose significant risks. Consumer and corporate distress is partially masked by credit availability, but underlying economic pressures suggest a fragile outlook, with potential for slower growth or recession if policies falter.