Is the US headed for a recession?

Donald Trump has a gift for inheriting valuable things. And the economy of January 2025 was no exception.

When the president took office, stock values were hitting record highs, unemployment was hovering near historic lows, and consumer confidence was stable. Wall Street expected that business conditions would only improve. Among investors, conventional wisdom held that Trump was serious about corporate tax cuts — but not about launching an unprovoked trade war against America’s closest allies (a proposition too pointless and self-destructive to be sincere).

Times have changed. Contrary to corporate America’s wishful thinking, Trump has made good on his promise for large tariffs on Chinese goods, steel and aluminum from all countries, and many Mexican and Canadian imports, triggering retaliatory tariffs from America’s trade partners. Largely as a result of these developments, US stock markets forfeited six months of gains in three weeks, while consumer confidence fell precipitously. All this has led countless Americans to ask whether their economy is headed for a recession (Google searches for that word have skyrocketed since the beginning of March).

There is no certain answer to that question. Economic forecasters generally believe that the risk of a US downturn in 2025 has risen sharply over the past month, but still remains unlikely. What’s left of Wall Street’s optimism rests on a simple truth: Trump (almost certainly) has the power to stabilize the economy whenever he pleases by merely abandoning his most arbitrary and haphazard trade policies. But betting on the president’s prudence seems only a little safer than investing in his memecoin.

The probability of a US recession has risen in recent weeks, according to major US banks. JPMorgan Chase now pegs the risk of a 2025 economic downturn at 40 percent, up from 30 percent at the start of the year. Goldman Sachs raised its own recession probability from 15 percent to 20 percent last week.

Even if the US does not enter a proper recession — which is defined as six months of declining economic activity — the outlook for economic growth has soured, according to the Atlanta Federal Reserve, Morgan Stanley, and other analysts.

Trump’s trade policies are the primary cause of such darkening forecasts.

Large and perpetually shifting tariffs hurt the economy in multiple ways. Tariffs are a tax on foreign-made goods paid by importers — such as retailers or manufacturers — who tend to pass their heightened costs onto consumers. This effectively reduces Americans’ purchasing power. According to one estimate from the Peterson Institute, if Trump’s tariffs on China, Mexico, and Canada were to be fully implemented, and left in place, they would cost the typical US household $1,200 a year.

When Americans make less money, they tend to reduce their spending on goods and services. And when consumer demand declines, businesses often lay off workers, who must then reduce their own spending — a dynamic that can yield a self-reinforcing, recessionary cycle.

Trump has mitigated his tariffs’ impact on consumers by repeatedly pausing them, or adding temporary exemptions for certain goods. Yet the fact that the president’s trade policy is constantly changing creates its own problems.

Economic uncertainty is bad for investment. As harmful as Trump’s tariffs are, if businesses knew they would be permanent, then some might invest in new US factories or mines that wouldn’t have been financially viable under conditions of free trade. By contrast, if no one can be sure that Trump won’t roll back those tariffs tomorrow then investing in such factories would be perilous. Uncertainty therefore leads many investors and companies to delay investment until long-term economic conditions become clear. And a pullback in investment reduces demand in the economy, thereby increasing the risk of recession.

These factors lay the groundwork for a stock market selloff. But that sell-off was accelerated by the president’s nonchalant attitude toward falling equity values. For months, financial analysts had assumed that the stock market boasted a veto over Trump’s most ill-advised economic policies: Given the president’s past enthusiasm for bragging about record stock prices, many believed that Trump would roll back his tariffs in response to any sustained drop.

But over the past week, the president and his advisers have signaled the opposite: That they are comfortable with inducing economic pain in the immediate term, for the sake of realizing their broader ideological goals. Asked about whether he expected a recession this year, Trump told Fox News last Sunday that he didn’t like to “predict things like that” but “there is a period of transition because what we’re doing is very big. … And there are always periods of, it takes a little time.”

Although Trump has been the primary driver of declining investor sentiment, he is not the sole cause of economic concern. The economy of January 2025 was broadly considered strong. But it had some vulnerabilities. Years of inflation had eroded Americans’ savings, causing some to fall behind on their loans. Credit card delinquencies and late payments on auto loans both rose in the final quarter of last year. And the labor market has shown some signs of slackening, with the percentage of Americans who say they can only find part-time work rising and the typical number of weekly hours worked falling to its lowest point since June 2010.

The Trump-induced stock market collapse risks exacerbating these sources of economic strain, since affluent households often pare back spending when the value of their stock portfolios declines.

All this said, there’s reason to think fears of an imminent recession have been overhyped. One source of such anxieties is the Atlanta Fed’s GDP forecast, which turned negative in recent weeks. But the Fed’s model is highly volatile, and its current projections are largely informed by data from early this year, particularly a 0.2 percent decline in consumer spending during January.

But there’s reason to think that this dip reflected fleeting headwinds. After all, much of the country experienced major winter storms in January, while southern California was devastated by wildfires. These natural disasters surely kept many Americans away from retailers, restaurants, and other businesses.

It is true that consumer sentiment has fallen precipitously in recent months, in response to the public’s anxieties over Trump’s tariffs. But such surveys have not been very predictive of consumers’ actual spending habits in recent years.

Meanwhile, the US economy continued adding jobs in February and unemployment remains low by historical standards. One of the government’s gauges of inflation also came in unexpectedly low Wednesday, showing that consumer prices were only 2.8 percent higher in February 2025 than they were one year earlier. If inflation continues to decline, then the Federal Reserve may feel comfortable cutting interest rates, which would make it easier for consumers to spend and businesses to invest.

While the US economy isn’t devoid of complicated challenges, Trump could all but eliminate the threat of a recession anytime he wishes. All he needs to do is rescind his unpopular and arbitrary tariffs.

Doing so would not undermine any of the president’s more respectable economic goals. Putting 25 percent tariffs on industrial inputs made in Canada and Mexico is not beneficial for American manufacturing, but harmful to it. And alienating core US allies does not bolster our nation’s national security but jeopardizes it.

Goldman Sachs’s belief that the risk of a recession is only 20 percent hinges on Trump’s responsiveness to deteriorating economic conditions: The fact that “the White House has the option to pull back if the downside risks begin to look more serious” tempers the bank’s anxiety.

Perhaps, if stocks remain depressed — while unemployment climbs — the president will decide to prioritize Americans’ economic well-being over his own ideological hobby horses. But I’m not sure that I’d put money on it. And a growing number of investors seem to feel the same.