In January 2025, the economy presented a complex scenario under President Donald Trump, who has a notable ability to inherit valuable assets. Upon taking office, stock values were reaching unprecedented heights, unemployment rates were at historic lows, and consumer confidence remained stable. Wall Street had high hopes, anticipating improvements in business conditions. Investors believed that Trump was committed to corporate tax cuts but doubted his seriousness about initiating a trade war with America's closest allies—a move many viewed as unnecessary and self-destructive.
However, the economic landscape has shifted dramatically. Contrary to the optimistic expectations of corporate America, Trump followed through on his promise to implement substantial tariffs on Chinese imports, as well as on steel and aluminum from all countries, and various products from Mexico and Canada. This led to retaliatory tariffs from America's trade partners, causing significant repercussions for the US economy. In a matter of weeks, US stock markets lost six months of gains, and consumer confidence plummeted. As a result, many Americans are now questioning whether their economy is headed for a recession, with Google searches for the term skyrocketing since early March.
While there is no definitive answer to the question of a looming recession, economic forecasters have noted a sharp increase in the risk of a downturn in 2025 over the past month. Major banks, such as JPMorgan Chase, have raised their estimates, now placing the risk of a recession at 40 percent, up from 30 percent at the beginning of the year. Goldman Sachs has also increased its recession probability from 15 percent to 20 percent. Even if the US does not enter a formal recession—characterized by six months of declining economic activity—the outlook for economic growth has darkened significantly, as reported by the Atlanta Federal Reserve and Morgan Stanley.
The crux of these deteriorating forecasts can be traced back to Trump's trade policies. The consistent imposition of large and fluctuating tariffs has adverse effects on the economy in several ways. These tariffs act as a tax on foreign goods, which importers—such as retailers and manufacturers—are likely to pass on to consumers. This, in turn, diminishes Americans' purchasing power. According to estimates from the Peterson Institute, if Trump's tariffs on China, Mexico, and Canada were fully enacted and maintained, they could cost the average US household a staggering $1,200 annually.
When consumers have less disposable income, they tend to cut back on spending for goods and services. This decline in consumer demand can prompt businesses to lay off workers, who then reduce their spending as well, creating a self-reinforcing cycle that could lead to a recession.
Trump has attempted to alleviate the impact of these tariffs on consumers by occasionally pausing them or issuing temporary exemptions for certain goods. However, the constant changes in his trade policy introduce their own set of challenges. Economic uncertainty is detrimental to investment; if businesses were certain that tariffs would be permanent, some might consider investing in new factories or mines that wouldn't be feasible under free trade. Conversely, the unpredictability of Trump's tariffs leads many investors and companies to postpone investment decisions until the long-term economic climate becomes clearer. This hesitancy in investment further reduces overall demand, amplifying the recession risk.
These dynamics contributed to a recent stock market selloff, which was exacerbated by Trump's indifferent response to declining equity values. Financial analysts had previously assumed that the stock market would act as a check on Trump's more misguided economic policies. Given Trump's history of boasting about record stock prices, many believed he would roll back tariffs in response to sustained declines in the market. However, recent signals from the president and his advisers indicate a willingness to endure short-term economic pain to achieve broader ideological goals.
While Trump has been a significant factor in declining investor sentiment, he is not the sole source of economic concern. The economy in January 2025 had strengths but also vulnerabilities. Years of inflation had eroded household savings, leading some individuals to struggle with loan payments. Late payments on credit cards and auto loans increased in the last quarter of the previous year. Moreover, the labor market had begun to show signs of slackening, with a rising percentage of Americans reporting that they could only find part-time work, and the average number of weekly hours worked had dropped to its lowest level since June 2010.
The recent turbulence in the stock market could further strain these economic pressures, as affluent households typically reduce spending when their stock portfolios decline. While the risk of a downturn is indeed rising, the overall odds remain low.
Despite the heightened fears of an imminent recession, there are reasons to believe that these anxieties may be overstated. One contributing factor is the Atlanta Fed's GDP forecast, which turned negative recently. However, this model is known for its volatility and is heavily influenced by data from early in the year, particularly a 0.2 percent decline in consumer spending in January. This decline may have been impacted by significant winter storms and wildfires in Southern California, which likely deterred many Americans from visiting retailers and restaurants.
While consumer sentiment has declined due to concerns over Trump's tariffs, surveys have not proven to be reliable indicators of actual consumer spending behavior in recent years. Moreover, the US economy continued to add jobs in February, and unemployment rates remain low by historical standards. Recent government measures also indicated an unexpected dip in inflation, showing only a 2.8 percent increase in consumer prices in February 2025 compared to the previous year. If this trend continues, the Federal Reserve may be inclined to lower interest rates, making it easier for consumers to spend and businesses to invest.
While the US economy faces numerous challenges, Trump possesses the power to significantly reduce the threat of a recession at any moment. All he needs to do is rescind his arbitrary tariffs. This action would not jeopardize any of his more legitimate economic objectives. Imposing 25 percent tariffs on industrial inputs from Canada and Mexico is detrimental to American manufacturing and compromises national security by alienating vital US allies.
Goldman Sachs believes the recession risk is only 20 percent, largely due to the White House's ability to respond to worsening economic conditions. The sentiment is that the White House has the option to scale back its policies if downside risks escalate. Should stock prices remain depressed, and unemployment rise, there is hope that the president will prioritize the economic well-being of Americans over his ideological pursuits. However, many investors remain skeptical, and this growing uncertainty is palpable in the market.
