The biggest threat to the American economy might be the American consumer’s sour mood. This episode was produced by Miles Bryan and Carla Javier, edited by Jolie Myers, fact-checked by Laura Bullard, engineered by Andrea Kristinsdottir and Patrick Boyd, and hosted by Jonquilyn Hill. Transcript at vox.com/today-explained-podcast Support Today, Explained by becoming a Vox Member today: http://www.vox.com/members A "99 cent Up & Less" sign in a Brooklyn neighborhood. Photo by Spencer Platt/Getty Images. Learn more about your ad choices. Visit podcastchoices.com/adchoices
Chapter 1: How worried are Americans about a recession?
How worried about a recession are you?
Yes, that's the big question. I'm on a scale of 1 to 10. I'm probably somewhere around a 5 or 6 now, which is way higher. If we had this conversation in January, I think I would have been like a 2. So it just shows you how much it's jumped up. You can pick your favorite economist. I think JP Morgan put the recession odds at 40%. Larry Summers was at 50%.
Goldman Sachs still pretty conservative around 20 to 25%. But everyone agrees the recession risks have really gone up.
Tariffs, the stock market, doge cuts. Americans are getting bad vibes from the economy. But if consumers quit spending, a vibe session could turn into a real session. I'm Jonquan Hill, guest hosting today's show. And all this is coming up on today, Explained.
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I'm Heather Long, an economic columnist at The Washington Post.
Heather, I have a question. This is just something I've personally wondered. Maybe it's because, like, I was 18 in 2008, but, like, is there, are there, like, what will make me say, oh, girl, there's a recession happening? And she's here. Like, are there things or you just got to wait and see? That's a good one.
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Chapter 2: What indicators suggest a recession is coming?
Yes. Yes, there are. Traditionally, it's the unemployment rate jumping up a lot. People are keeping a close eye on the early signs of that. The other one that I'm keeping a close eye on is is consumption, retail spending. And in particular, I've been watching the normally very dull earnings reports from the companies, but I think the companies are being pretty explicit.
What we don't know is potential consumer demand that's across the board, across based on how tariffs ripple across the economy, for instance. But we have that.
Although we can pass this cost to our business partners, higher prices to an already pressured consumer will likely impact our segment volumes and ultimate revenue and profitability.
You know, they're not out there saying, you know, Trump this, Trump that. But they are saying pretty clearly we are ratcheting back our forecast for this year, particularly like a lot of the consumer facing places are really feeling it.
Let's get into the stock market first, because that's where we've seen some of the most dramatic change. Stocks went way up after Trump was elected, and since they've fallen dramatically. Why? What is going on?
It's really been almost a one-to-one reaction to the tariff plans. Initially, there was the huge rally, this belief Trump's coming back, we're going to be in the boom time. He's talking about deregulation.
We'll remove 10 old regulations for every new regulation.
He's talking about tax cuts. For everybody, they're in there, they're waiting for you to vote. But then every single day since the election, he would mention tariffs.
I always say tariffs is the most beautiful word to me in the dictionary.
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Chapter 3: How are tariffs affecting consumer behavior?
What's different now than what I was seeing even a couple of weeks ago is when you look at these consumer sentiment surveys that are really in the dumps now, you know, people are very afraid. People, this is the vibe session. Trump is in a vibe session, let's call it. People, when they're asked, do you think unemployment will go up?
in six to 12 months or do you think you will financially be worse off? There's been this crazy spike in people who think they or someone they know is going to lose their job very soon and that their finances are going to be worse off. And that was different. Under the Biden administration, a lot of people gave very poor grades to the economy. They didn't like the economy. They were very worried.
But when they were asked, are your personal finances going to be better off in six to 12 months? The vast majority of people would say yes.
We did it. We did it, Joe.
And now, what do you do? What do you do if you think there's going to be a recession or you might lose your job, right? People are pretty rational about this. And of course, they stop booking vacations. They stop going out to eat as much. You know, they start cutting back.
You can see it in the data where at places like an Applebee's or an Olive Garden, you know, people are not ordering appetizers and desserts anymore. You know, they're really pulling back or they're simply not going at all. And these earnings calls for these types of chain restaurants are talking about people who earn $75,000 or less just aren't coming anymore.
Our teams responded by introducing limited-time offers and value-driven promotions to attract cost-sensitive consumers.
And so I think people are a little bit tapped out. The savings is run down, you know, now they're fearful and now they were already starting to turn a little bit and belt tighten and now it's like extreme.
Why does it matter that people are afraid? Does that have an impact on the economy?
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Chapter 4: What impact do consumer fears have on the economy?
You do what you should have done for the last 70 years, which is start to spend on your own defense so that you don't rely on America anymore. So there's one statistic, really, and that is what Germany has done in the last month.
The newly elected chancellor of Germany, Friedrich Merz, he's not yet installed as chancellor, but he is the leader of the largest party, and they're in coalition negotiations now, and barring some enormous crisis, he will be chancellor. The night of his election, he said, we can no longer rely on America.
My absolute priority will be to strengthen Europe as quickly as possible so that step by step we can really achieve independence from the United States. And a few days later rolled out this extraordinary spending plan of a trillion euros, which comprises of two big parts. The first is half a trillion euros spent on defense.
And the second was a move to essentially de-link defense spending from debt spending, saying it doesn't matter how much we borrow for defense. So just to put this into perspective, the sort of scale of the German pivot on this, the Germans have a word, Schuld. It means debt and it also means guilt. They have linked these two ideas to the extent that having a balanced budget is...
is sort of part of their national psyche. So for Merz to come in and say, this doesn't matter anymore, what matters is defending Europe, it is a huge moment, not just for Germany, but for all the other countries who look at them and say, wow, if they're getting serious, then we should too. And there's real world benefits here, right?
The German car industry that used to be sort of the symbol of European industrial greatness, exporting all around the world, it's gone through some really hard times recently with high energy prices, with competition from China, with this looming trade war. You're now seeing kind of mothballed car factories being converted or discussions about converting them into tank factories.
Volkswagen is exploring a significant pivot, potentially transforming its Osnabrück plant into a military production hub. With car sales slowing, CEO Oliver Blum is open to defence manufacturing, aligning with Germany's increased military spending.
There are real-life things happening, and at a given time, if this all plays out the way the Europeans hope, you could have a much better European economy as a result of this huge defence boom.
Are we going to see a real change to the way European lives look? I mean, it's often pointed to Europe as look at the social services they have. Look at, you know, health care, all these different things. Are we getting to the end of that? Is that going to no longer be the standard in Europe?
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