Recession fears persist amid inflation and trade wars
President Donald Trump did not rule out the possibility of a recession in a recent Fox News interview, amid his administration’s continuing trade war.
With the stock market tumbling, consumer confidence skidding and U.S. companies ramping up layoffs, it may look like the nation is hurtling toward a recession amid President Donald Trump’s widening global trade war and federal job cuts.
It isn’t – yet. That’s mostly because American consumers are still in good financial shape and the nation’s businesses generally remain optimistic despite growing uncertainty about the trade conflicts and federal cuts, forecasters say.
But trouble spots are mounting. Economists are raising their inflation forecasts and downgrading their 2025 growth estimates. And some analysts say it’s likely the nation will topple into a downturn if Trump moves ahead with all of the tariffs he has threatened on a broad range of imported goods.
The gambit would sharply raise consumer prices and sap Americans’ purchasing power while ratcheting up business uncertainty, experts say, curtailing investment and hiring.
“The economy will likely suffer a downturn if the Trump administration follows through on the tariff increases it has announced and maintains those tariffs for more than a few months,” Mark Zandi, chief economist of Moody’s Analytics, posted on X on Monday.
What is a recession?
A recession is informally considered at least two straight quarters of declining economic output. But the technical definition is “a significant decline in economic activity that is spread across the economy and lasts more than a few months,” according to the nonprofit National Bureau of Economic Research.
The measure is based on employment, income, consumer spending and industrial production, among other criteria. An economic tailspin is typically accompanied by hundreds of thousands or millions of net job losses.
What is the tariff crisis?
Until the past few days, many economists believed Trump was wielding tariff threats as a negotiating ploy to force foreign countries to crack down on unauthorized immigration and illegal drug flows into the U.S. or to lower their own levies on U.S. exports to those nations. Ultimately, he would back down as the economy and stock market teetered, the thinking went.
Sunday, however, when asked about the prospect of a recession, Trump told Fox’s “Sunday Morning Futures,” “I hate to predict things like that.”
“There is a period of transition,” he added, “because what we’re doing is very big.” Trump aims to prod manufacturers to move production and jobs back to the U.S.
Jonathan Millar, senior economist at Barclays, said he still believes administration officials likely will observe the effects of tariffs on the economy and stock market “and they’re going to back down.”
But now, “We’re putting more weight on the possibility they wouldn’t,” Millar said. “We’re seeing a real change in rhetoric.”
What are the odds the US goes into a recession?
Zandi puts recession odds at 35%, up from 15% early this year. Goldman Sachs has bumped the chances of a slump from 15% to a still-modest 20% but only because it still reckons the White House will pull back “if the downside risks begin to look more serious.” JPMorgan Chase figures there’s a 40% chance of a downturn.
What goods are subject to US tariffs?
Trump already has socked some imports with tariffs, including a 25% levy on steel and aluminum; 20% on shipments from China; and up to 25% on goods from Canada and Mexico that aren’t covered by a 2020 trade deal among the U.S. and those nations.
Yet the most damaging import taxes loom next month. Those include duties on the remaining imports from Canada and Mexico not shielded by the trade agreement; a 25% fee on products such as autos, pharmaceuticals and computer chips; and sweeping reciprocal tariffs that would match whatever levies other countries charge the U.S. while also accounting for other trade barriers, such as value added taxes and government subsidies.
Although businesses could absorb some of the tariffs, narrowing their profit margins, economists believe most will be passed on to consumers through higher prices.
How is current consumer confidence?
The existing tariffs, the prospect of more and the possibility of several hundred thousand federal layoffs are hammering consumer confidence. Last month, a key confidence index posted the largest monthly decline since August 2021, according to the Conference Board.
Flagging confidence doesn’t necessarily spell a big drop in consumer spending – which makes up 70% of economic activity – economist Bernard Yaros of Oxford Economics wrote in a note to clients. While purchases of discretionary items such as cars, clothing and dining out tend to slide when Americans’ outlook darkens, outlays for essentials such as food, housing and gasoline typically hold up, Yaros said, noting they make up 70% of all consumption.
If consumer sentiment falls as sharply as it did in the pandemic-induced inflation surge of 2021, it likely would reduce household spending by just three-tenths of a percentage point, Yaros said.
How is the US economy doing right now?
Meanwhile, the economy’s key pillars are still solid. U.S. employers added a respectable 151,000 jobs in February and a sturdy average of 200,000 a month since December. Average hourly wage growth is still outpacing inflation, as it has since May 2023, giving Americans more purchasing power, Yaros noted. And household balance sheets, which include debt and assets such as homes and stocks, are still on stable footing after big price run-ups the past few years, Millar said.
But cracks are forming. Consumer spending declined 2% in January. Paul Ashworth of Capital Economics traced some of the drop to severe winter weather but noted early indicators of retail sales in February point to a further retreat.
The benchmark S&P 500 stock index fell 2.7% Monday, compounding last week’s losses, and it’s down 8.7% from its record high in mid-February. That’s a big worry because the effects of wealth gains or losses on consumer spending are four times as large now as they were during the previous two economic cycles, Yaros said.
And U.S. employers announced 172,000 job cuts in February, the highest total for that month since 2009 and the largest tally for any month since the depths of the COVID-19 recession in July 2020.
And while hourly wages are still rising after adjusting for inflation, more employers are trimming workers’ hours, curtailing their income overall, Millar said.
It all adds up to an economy on the edge.
Despite the recent selloff, the S&P 500 index is still up 10% over the past year, Yaros said. A bear market in which stocks lose 20% of their value would take a bigger toll on consumption, he said.
What are the predictions for the economy?
For now, several top forecasters predict higher inflation and a more pronounced slowdown in growth that stops short of recession. Without tariffs, Goldman Sachs expected the Federal Reserve’s preferred annual inflation measure to fall from 2.7% in January to 2.1% in December, just above its 2% goal. Now, it expects the gauge to rise to 3% by year’s end.
Goldman projects the economy will grow 1.7% this year, down from its prior forecast of 2.2%.
But Millar agrees with Zandi that if Trump imposes all his planned tariffs, “then we’ll probably get a recession.” In the current quarter, the economy will likely contract by an annual rate of 2.4%, the Federal Reserve Bank of Atlanta estimates.
What is the Fed expected to do with interest rates?
A weakening economy and rising inflation – an unusual tandem known as stagflation – would present a vexing challenge for the Fed, economists say. The Fed lowers interest rates to stimulate a soft economy and raises them or keeps them high to battle inflation. But what if both things are happening?
The Fed cut interest rates as inflation eased last year but, with price increases picking up, officials have paused since December.
Tariffs could force the central bank to keep rates higher for longer to contain inflation, further dampening the economy, Morgan Stanley wrote in a research note. Yet even as the economy and job growth slow, the Trump administration’s deportations of millions of immigrants could keep the unemployment rate low since fewer people will be competing for jobs, the research firm said.
That too would keep Fed officials from chopping rates to boost the economy.
“It makes things really difficult for the Fed,” Millar said.
Unless a recession and widespread layoffs eventually compel Fed officials to act.
Contributing: Zachary Anderson, USA TODAY
This story has been updated to correct a typo.
