Recession Risk Rising, Says Apollo's Torsten Slok

The U.S. labor market showed signs of resilience in February, with nonfarm payrolls increasing by 151,000, according to the Labor Department's latest report. However, economists warn that the underlying economic landscape is becoming increasingly precarious, clouded by the Trump administration's trade policies and proposed federal spending cuts.

While the headline jobs number was slightly below expectations of 160,000, analysts are focusing on the growing uncertainty fueled by escalating trade tensions and their potential impact on consumer sentiment and business investment.

"The soft data going into today's number has been deteriorating, both when it comes to consumer confidence and corporate confidence," said Torsten Slok, Chief Economist at Apollo, in an interview with CNBC. "We're seeing CapEx plans from the regional Fed districts are beginning to roll over. The worry you can have is that the soft data is saying that both consumers and corporates are beginning to worry about the outlook."

This sentiment echoes growing concerns across the market. A sharp selloff in the Magnificent 7 stocks last week, most notably NVIDIA, suggests a broader market rotation and heightened investor nervousness. The VIX index, a measure of market volatility, has risen above 20, historically signaling caution.

Trade War Clouds the Outlook

A major driver of this uncertainty is the Trump administration's aggressive trade agenda. The administration has recently imposed tariffs on goods from Canada, Mexico, and China which cover 44% of U.S. imports. While auto imports were temporarily exempted, these exemptions are slated to end on April 2nd.

The initial shockwaves of these policies are already being felt. Latest data revealed an unprecedented $37 billion deterioration in the trade balance — more than twice the magnitude of any month-to-month change over the last 50 years. The Atlanta Fed is now forecasting a negative -1.5% growth rate for the first quarter, a stark warning sign.

Trade deficit in January also widened to its largest point on record, reaching $131.4 billion. Firms are scrambling to stockpile goods ahead of potential tariff increases, with imports of industrial supplies surging 34%.

Reuters' polling of economists revealed deep concerns about recession risks across North America, with the consensus that economists are having difficulty forecasting due to the policy. Even when tariffs are rescinded, there is still a tangible impact.

"Given this is so uncertain and that there are new announcements every hour or so, it's kind of unclear what the environment is going to look like. It's hard to deny the risk of a recession has intensified," said Jonathan Millar, senior U.S. economist at Barclays in New York, to Reuters.

"People are pushing off spending and that feeds through to a drag on growth, or perhaps even declines in growth if it's strong enough. There's a risk both in terms of higher inflation and downside for activity."

Federal Cuts Impact Consumer Sentiment

Adding to the uncertainty is the potential impact of federal government spending cuts. Slok estimates that the federal government employs approximately 3 million people, with an additional 6 million contractors. This total federal-related workforce of 9 million represents about 5.6% of the U.S. workforce.

While direct layoffs may have a limited immediate impact, the "sentiment effect" could be significant. Slok warns that the real fear is "this spreading of the sentiment that people begin to pull back and in the worst case say 'well maybe we shouldn't be spending so much in the household sector', and maybe corporate will also say 'well maybe we shouldn't hire, if there's such an elevated level of uncertainty'." He adds, "That could be the real risk where things could really begin to accelerate."

Inflationary Pressures Mount

Tariffs also pose an upside risk to inflation. Wells Fargo reports that short-term inflation expectations are recalibrating in response to trade policies, and consumers are aware of tariff-related price pressures. Businesses are also bumping up their short-term inflation expectations, the New York Fed recently reported that year-ahead business inflation expectations in February picked up to 4.0% among service firms (+1.0 percentage point over the year) and 3.5% among manufacturing firms (+0.5 percentage points).

M&A Activity Stalls

The heightened uncertainty is also weighing on business investment decisions, particularly mergers and acquisitions (M&A). According to Charles Schwab, M&A activity in the first two months of the year was the weakest since the 2008-09 financial crisis.

“You did see throughout the course of earnings season, a record mention of tariffs on earnings conference calls, even to a higher degree than the peak that we saw during the 2018 trade war,” said Liz Ann Sonders, chief investment strategist at Schwab.

The slowdown in M&A activity is particularly evident in the biotech sector, where smaller companies often rely on acquisitions by larger players. The Nasdaq Biotech Index (NBI) is down more than 9% from last fall's highs, reflecting the plateauing of biotech M&A.

Looking Ahead

The latest jobs numbers do little to dispel the mounting unease surrounding the U.S. economy. Trade policy volatility and fiscal uncertainties are creating a climate of apprehension across sectors. For now, as Wells Fargo noted, "the only certainty on tariffs is uncertainty."