When the next recession hits, whoever is president will face intense pressure to cut tariffs, so don’t rely on them for revenue, top economist says

Moody's Analytics chief economist Mark Zandi warns that President Trump's tariffs, currently yielding $300 billion annually at a 20.2% effective rate, are an unreliable federal revenue source. Zandi emphasizes their executive order basis allows for easy removal, particularly during an economic downturn when a President would face significant pressure to cut them for consumer relief, with 67% of costs already passed to consumers. Given emerging recessionary indicators, he advises against fiscal planning that assumes their long-term permanence.

Analysis

According to Moody’s Analytics chief economist Mark Zandi, the approximately $300 billion in annual revenue generated by current U.S. tariffs is an unreliable pillar for federal fiscal planning. While the average effective tariff rate has reached 20.2%, its highest level since 1911, the revenue's permanence is questionable due to its implementation via executive order, which allows for swift removal without congressional approval. This political vulnerability is magnified by mounting economic headwinds; Zandi notes that with over half of U.S. industries already shedding jobs, a recession may be imminent. In such a downturn, a president would face significant pressure to cut tariffs to provide relief for consumers, who, according to a Goldman Sachs calculation, are already bearing approximately 67% of the tariff costs. This situation renders the tariff income, which is insufficient to close a federal deficit approaching $2 trillion, a volatile and temporary line item, cautioning against its inclusion in long-term fiscal assumptions.

Key Decisions for Investors

• Investors should discount the long-term sustainability of the $300 billion in annual tariff revenue when modeling future U.S. fiscal deficits, as its potential removal during a recession could exacerbate budget shortfalls and impact sovereign risk.
• Given that 67% of tariff costs are passed on to consumers, it is prudent to exercise caution with consumer-facing sectors, particularly discretionary goods, as this hidden tax will likely amplify the impact of a potential recession on household spending.
• Monitor leading economic indicators, such as the industry-level employment data cited by Zandi, for confirmation of a downturn, which would act as a primary catalyst for a presidential decision to cut tariffs and suddenly alter the cost basis for import-heavy industries.
• Consider the heightened political and economic risk for companies whose profitability is highly sensitive to trade policy, as the analysis suggests tariff relief is more a matter of 'when' than 'if,' especially in a recessionary context.