New Mexico economists give their takes on a possible recession
Matthew Narvaiz, Albuquerque Journal, N.M.
6 min read
Apr. 13—By Matthew Narvaiz
The economy has been in a fluctuating state of late.
This month, President Donald Trump declared April 2 "Liberation Day," announcing sweeping tariffs on most countries. He then paused many of those tariffs on Wednesday, except China, on which he raised tariffs on exports to 145% as of Thursday.
As a result, economists say there is still room to worry about an economic decline.
The Journal asked three experts — Kelly O'Donnell of O'Donnell Economics and Strategy, University of New Mexico Bureau of Business and Economic Research Director Michael O'Donnell (no relation to Kelly O'Donnell) and New Mexico State University Center for Border Economic Development Director Christopher Erickson — for their takes on a possible recession and what that would look like in the state.
Their responses have been edited for length and clarity.
Is the United States headed toward a recession? Why or why not?
Kelly O'Donnell: At this point, a recession seems more likely than not. Seldom have so many negative factors simultaneously converged on the U.S. economy, and unlike the global pandemic or world wars, the current crisis is entirely self-imposed. The tariffs and stock market turmoil are major contributors to negative sentiment about the economy, but they are just the most visible symptoms of an emerging approach to economic policy by the federal government that fails to prioritize the economic well-being of Americans.
This is problematic for the world economy because it signals that the U.S. is no longer operating in a rational, predictable manner. Capricious policymaking heightens uncertainty among businesses, investors, consumers and trading partners. Fear of future volatility reduces their willingness to spend, invest or take the risks that drive innovation.
Cuts to public health further destabilize the economy by leaving us vulnerable to the ravages of another pandemic, while deportations diminish our already limited workforce, especially in key industries like agriculture and hospitality.
Meanwhile, threats to cornerstone programs like Social Security and Medicare make U.S. households want to save more while at the same time, stock market declines and inflation are diminishing spending power and consumer confidence.
Michael O'Donnell: I think that there is probably a 50/50 chance that the U.S. is headed toward a recession. This is a much higher chance than normal, but that does not mean that it is absolutely certain to happen.
The difficulty with predicting a recession is that this time economic volatility is not strictly based on typical economic fundamentals, such as GDP growth, employment growth and income growth, which up until this point have been fairly solid. Rather, it is being driven by changes to national policy, and perhaps even more challenging for the economy, policy uncertainty. This includes things like large federal job cuts, potential changes to social safety net programs and the recently announced tariff policy.
Ultimately, regardless of whether the technical definition of a recession is met, after several years of solid macroeconomic growth, many analysts believed that the economy was already primed for a slowdown. None of the announced policy changes are likely to slow that trend, especially in the near term. Furthermore, if the economy turns south, it is not clear how, or when, President Trump or Congress will react.
Erickson: Regardless of the long-term effects of tariffs, the "Liberation Day" tariffs, had they not been paused (except China's), would have disrupted global supply chains like no other event in recent memory besides the COVID pandemic. Had they remained in place the likely outcome would have been a recession. As things stand now, uncertainty about the Trump administration's trade policies makes business planning difficult.
Offsetting this is expected Fed action to lower the interest rate coming out of the Fed's unscheduled meeting on April 7. Should the administration continue the tariff pause and should the Fed lower interest rates, we could avoid a recession. I put the chance at 50/50.
What would a recession look like in New Mexico? What would be most affected?
Kelly O'Donnell: New Mexico is more vulnerable than ever to the impacts of recession. Historically, high levels of federal investment have buffered us from national economic volatility. However, the federal assault on immigrants and higher education, and efforts to dismantle safety net programs will hit our state particularly hard.
Global recession also threatens New Mexico's major industries — oil prices have already dropped precipitously due to lower demand and tourism always takes a hit when discretionary income falls. New Mexico policymakers have wisely banked earnings from our public lands in our state's permanent funds, providing an important source of revenue for current government operations and future generations. However, the stock market tumble has already cost those funds over $1 billion.
Michael O'Donnell: It is difficult to know exactly what a recession would look like in New Mexico because that would depend on understanding the specific drivers of the recession and the policy responses in the face of the recession.
Through most recessions, New Mexico has weathered the initial shock well relative to other states. One of the reasons, perhaps ironically, is the state's historical federal dependence.
This includes that New Mexico has a higher percentage of federal workers than the national average — this workforce has typically been robust to the ups and downs of business cycles; that the state receives a good amount of federal contract and grant money for everything from local economic development initiatives to research at the national laboratories; and that because New Mexico is a relatively low-income state, a high percentage of households receive income supports, which effectively put a floor under potential income losses for households and families.
All of these things have helped to keep New Mexico afloat and have actually stimulated local economies throughout the state when the U.S. economy has gone south. However, because national policy is more difficult to predict than ever, it is unclear how the state will fare this time.
Erickson: National recessions often translate to a less severe but longer-lasting downturn in New Mexico. Our big exposure is the oil and gas production. While this sector employs relatively few people, it has a disproportionate impact on government revenues and economic investment. The impact of potential and existing tariffs on this sector is complicated. Both the U.S. and Canada have imposed tariffs on oil and gas imports, although how the tariff pause affects this is unclear. One piece of good news for New Mexico is our strong service sector, which tends to be relatively recession proof.
Matthew Narvaiz is a business editor for the Albuquerque Journal. You can reach him at mnarvaiz@abqjournal.com.
