The Fire Hose of Chaos: Wait, The Recession Is Already Here?

Summary

Highlights

• Peter Zeihan explains why the US is likely entering a recession. 📉
• Business confidence has plummeted due to erratic policies from the Trump administration. 🤔
• Despite chaos, government spending isn't a major disruptive economic factor. 💸
• Industrial construction has stopped, marking the longest halt since WWII. 🚧
• Manufacturing is suffering from tariffs, especially in the auto industry. 🚗
• Low-income Americans face consumption declines due to new tariffs on agriculture. 🍏
• Zeihan predicts a prolonged recession given Trump's complex industrial ambitions. ⏳

Key Takeaways

• The US is on the brink of a recession, driven by erratic policies and tariffs. 📉
• Government spending continues amidst chaos but isn't a major economic factor. 🇺🇸
• Industrial construction in the US is at a standstill due to economic uncertainties. 🚧
• Manufacturing is hit by fluctuating tariffs, affecting auto industries significantly. 🚗
• Consumption, particularly among the lower-income sectors, is declining due to agricultural tariffs. 🛒
• A long recession is anticipated, linked to challenges in expanding the US industrial footprint. 🏭

Overview

Chapters

• 00:00 - 00:30: Introduction Peter Zion greets viewers from Iowa during Easter week. He addresses inquiries about the potential occurrence of a recession, asserting that a recession seems likely. He mentions that during the U.S. presidential transition in January, indicators for consumption, industrial, and government activities were closely observed.
• 00:30 - 01:00: Economic Expansion Status During a period of economic expansion, some complications emerged that warranted attention, but the outlook was generally positive with no expectation of change. However, the erratic policies of Donald Trump have led to a collapse in business confidence. As a result, the United States is now grappling with regulatory and geopolitical risks, alongside escalating tariff issues, which have increased notably in the past six weeks to a total of 92 tariffs. These factors contribute to a challenging economic environment.
• 01:00 - 01:30: Impact of Erratic Policies The chapter 'Impact of Erratic Policies' discusses how unpredictable government policies have frozen activities across various sectors, impacting businesses, consumers, and governments. This paralysis is expected to lead to a significant, albeit avoidable, recession. The discussion touches upon four growth categories, starting with the government sector. Despite actions taken by influential figures like Doge, it is noted that the president's authority has limitations.
• 01:30 - 02:30: Government Spending The chapter titled 'Government Spending' discusses the structure and operation of federal government spending, particularly focusing on the mandate each department has, which is congressionally approved. It explains that significant cuts to federal employment, such as those suggested by certain federal departments without congressional approval, are often impractical or reversed. A specific example mentioned is the Department of Health's (DoH) actions, which have largely been undone, with most savings being minimal and many employees rehired. The chapter implies the complexity and challenges in enacting swift or large-scale reductions in government spending and employment without congressional backing.
• 02:30 - 03:30: Industrial Spending The chapter discusses the industrial spending strategies implemented during the Trump administration's second term. The focus is on the methodical approach of utilizing cabinet secretaries and securing legal frameworks from Congress to facilitate budget reductions. However, these changes are not expected to be immediately observable within the current or subsequent fiscal quarter. Despite the disarray in federal government operations, spending continues unabated, leading to high costs without functional benefits, which poses an economic challenge.
• 03:30 - 04:30: Manufacturing Challenges The chapter discusses the challenges faced by the manufacturing sector due to changes in government regulations and tariff policies. Despite setting records for industrial spending on new plants in 2023 and 2024, the momentum halted abruptly in March due to regulatory changes and tariff-related confusion, leading to uncertainty in costing and planning for new projects.
• 04:30 - 05:30: Consumption Recession The chapter discusses the impacts of a lack of industrial construction in the United States, noting that this is the longest period without such activity since World War II, which is affecting about 10% of the economy. Additionally, manufacturing is suffering due to inconsistent tariffs on Canada and Mexico, highlighting the economic strain caused by these factors.
• 05:30 - 07:00: Conclusion The chapter discusses the intricate supply chain of the automotive industry, emphasizing that a vehicle comprises approximately 30,000 parts which frequently cross borders among NAFTA partners for optimal assembly. However, impending tariffs on both finished cars and their components could drastically increase vehicle costs by $12,000 to $20,000 if manufactured in North America, potentially devastating the industry.

The Fire Hose of Chaos: Wait, The Recession Is Already Here? Transcription

• 00:00 - 00:30 Hey y'all, Peter Zion here coming to you from Iowa. Happy Easter week. Happy Easter week. Happy Easter week. Anywh who, um a lot of you have written in to ask um whether I think we're going to be in a recession and why. Uh short answer is yell. Yeah. Um 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 were
• 00:30 - 01:00 all green. I don't 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. And 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 u 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, we've had 92 tariff
• 01:00 - 01:30 policies um 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
• 01:30 - 02:00 fire most federal workers. Neither does the Office of Management and Budget and certainly Doge, which doesn't even have a congressional mandate. In instead, every department in the federal government does have a federal mandate and has congressionally mandated activities. Uh so you can't fire these people without congressional activity. So everything that DoH has done has 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.
• 02:00 - 02:30 Uh 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. Uh 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
• 02:30 - 03:00 negative but not a big one. So government's kind of a non-factor right now. Uh next up is industrial spending primarily on construction of new industrial plant. Now, in calendar year 2023 and 2024, we were setting records every single month. And it all came to a screaming halt on the 1 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
• 03:00 - 03:30 structure is any longer to build in the United States and so no one is building in the United States. Um we have already had a longer stretch of zero industrial construction at any point uh in the United States uh since World War II. Uh now that is only about 10% of the economy, but it's at a huge drag right now. Next up is manufacturing. Uh 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
• 03:30 - 04:00 things like auto spending. Your average automotive has 30,000 parts. And on par, uh, 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 a vehicle going up by 12 to $20,000 if it's made in North America. And uh, that is going to be crushing. So with the existing tariff
• 04:00 - 04:30 that we have right now that was implemented on the first week of April that was already enough to trigger a manufacturing recession in the really heavily autocommitted places like Tennessee, Kentucky, uh Michigan, Indiana, Ohio. And what we're going to see uh in the first of May is that will spill out to the other 25 states that are big into transport technology and
• 04:30 - 05:00 that's everybody from Washington to Texas to uh South Carolina. So then we get a manufacturing uh recession. That's another 15 to 20% of GDP. And then finally there's consumption which is the big boy. Uh three stories here. First of all, uh Trump says we're going to get agricultural tariffs very very soon. In fact, by the time you see this video, it might have already happened. Uh for the bottom quintile of the American population, onethird of income is spent on food. So that immediately is enough
• 05:00 - 05:30 to translate into a consumption recession for the poor and especially poorer parts of the United States such as the Deep South or some parts of the Rocky Mountains. Uh second, the wealthy. uh most of their consumption is tightly correlated to what's going on with the stock market and that's been a 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
• 05:30 - 06:00 recording, we have 145% tariff on uh 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 uh 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 reexpand the industrial footprint in the United States and get back into manufacturing in a big way. But that
• 06:00 - 06:30 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 2 years. Which means that this transition period, best case scenario, according to Trump's words himself, is 2 years of inflation and recessionary activity. That's assuming that he's made the plan perfectly. He hasn't. And that assumes
• 06:30 - 07:00 that he's right about what he's doing. He's not. Uh 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.