The narrative is familiar by now. Trump’s second-term tariff barrage, combined with strained global supply chains and hawkish central banks, has triggered widespread fears of stagflation.
Most forecasters see slower growth, higher inflation, and increased recession risk. Markets have priced in a drag on demand, earnings and investment. Yet UBS's Jason Draho thinks this view might be missing the point, or at least overplaying the downside.
In his latest blog, Draho, CIO for the Americas, makes a contrarian case: What if the US economy is more resilient to tariff shocks than most economists expect?
What if the data, rather than signalling an inevitable downturn, are instead distorted by familiar quirks, ones we have misread before?
Digging deeper
Take the most recent GDP and jobs prints. First-quarter US GDP contracted by 1.4%. A red flag, on the surface. But days later, April nonfarm payrolls surprised to the upside.
The same pattern appeared in 2022, when negative GDP was followed by unexpectedly strong job growth. That was later traced to front-loaded imports amid supply chain anxiety, a data distortion now possibly repeating as companies rush to beat tariff deadlines.
Draho argues that while the risks of tariffs are real, they may be overstated in the near term. Much like in 2022, households remain relatively healthy, even if the pandemic-era savings buffer has eroded.
The labor market is softening but remains fundamentally stable. And although Fed policy is tighter now than it was two years ago, it is not restrictive by historical standards. In a pinch, rate cuts could arrive quickly, albeit reactively.
Uberfication for the nation
There is also what Draho calls the Uberfication of the economy, a kind of supply and demand dynamism that allows prices and activity to rebalance rapidly.
This may explain why inflation has cooled without a recession, and why companies may be better prepared to absorb the latest supply-side shock. Lessons learned from the last round of bottlenecks could help dampen the effects of tariffs this time around.
The equity market, too, may be reflecting this optimism. The S&P 500 is up 14% from its lows. Draho believes that part of the rally may stem from a subtle shift in expectations, a growing belief that the worst-case tariff scenario is unlikely to materialise.
Momentum shift
Momentum from strong tech earnings and systematic fund flows has added fuel. Still, he cautions that markets may not be fully pricing in the risk of softer data ahead.
The punchline, according to UBS, is not that tariffs are harmless. It is that the binary framing of tariff equals downturn may be too simplistic. Investors should stay open to alternative outcomes and prepare for volatility.
But they should also remember, Draho writes, that “limiting your imagination about the US economy” is often one of the biggest mistakes you can make.