MARKET UPDATE - 5 Reasons Why A US Recession May Come In 2025

The "Tariff Recession" melodrama continues. No one, including us, knows what the future holds for the US economy, but disruptions have been real and significant.

Forecasts of economic growth have steadily declined since the president kicked off the trade wars in February:

Atlanta Fed

A slowdown in economic activity and growth is virtually assured at this point, regardless of what happens with trade policy. It is certainly possible that the US economy simply flattens out and pauses without significant job losses or economic declines. But it is also distinctly possible that this slowdown metastasizes into a recession.

Between tariffs and policy uncertainty, the previous analyst consensus for double-digit S&P 500 (SPY) earnings growth has been dashed. There have been more downward earnings estimate revisions over the last few months than at any time since the COVID pandemic:

Sherwood Media

While some think that the trade wars and policy uncertainty will soon resolve with finality, we think it is likely to persist.

There has already been significant effects of this environment in the form of a collapse in the relative value of the US dollar as investors reallocate capital from the US to other international markets.

Data by YCharts

While economic news is coming out at a frenetic pace, there are five reasons why we believe economic growth is at least going to significantly slow down and possibly also become negative later this year.

Below, we discuss them one by one.

1. Tariffs (And Tariff Uncertainty)

We start on this point, because tariffs are undoubtedly the biggest catalyst for an economic slowdown.

For context, the current average effective tariff rate is a large multiple higher than what it was at the beginning of 2025.

The current rate may decline, as the most recent news suggests that Trump may substantially cut down the tariff rate on Chinese imports, even without a new trade agreement in place. However, Trump also made clear that tariffs on China would not be zero.

The Wall Street Journal reports that the likely area where tariff rates on China will settle is in the 50-65% territory, which would still be restrictively high. To quote the WSJ:

Even if Trump decides to lower some tariffs on Chinese imports by half, that level would still mean the U.S. markets would be all but closed to many Chinese makers of electrical machinery and equipment and other products. Some analysts have estimated that trade between the two countries could dry up within months at such a high level.

This change was necessary to avoid an imminent and disastrous wave of small- to mid-sized business bankruptcies, as many American businesses are totally reliant on China for their supply chains.

Ryan Peterson, CEO of global logistics company Flexport

Given the fact that US tariff rates can change at a moment's notice based on the mercurial whims of one person, there remains very little clarity on the outlook for tariffs over the next several years.

Trump's goals of reshoring manufacturing and eliminating bilateral trade deficits have not changed, and yet he has also shown willingness to pull back on the severity of his tariffs when the market reacts poorly to them.

Hence we find trade policy uncertainty soaring right now.

Trade Policy Uncertainty At A Record High:

St. Louis Fed

Some might be tempted to think that Trump's brief stint with tariffs is now over, that leverage over foreign countries has been attained, and that announced trade deals will deliver even lower tariffs and more good news to the market going forward.

But it is important to acknowledge that Trump's instincts have not changed.

For instance, just recently, Trump stated that "there's a real chance" the revenue raised from tariffs could completely replace the income tax. Economists say that this idea is "mechanically impossible," but it demonstrates the president's desire to keep his tariffs in place indefinitely.

Many market participants keep expecting that some degree of enduring clarity is forthcoming soon, but it is entirely possible that trade policy uncertainty ebbs and wanes continuously over the next several years.

As a result of both tariff hikes and uncertainty surrounding the future of tariffs, economists now forecast a sharp drop in GDP growth for the remainder of this year.

Peterson Institute

The outlook becomes brighter in 2026, largely because of assumed tax cuts, but growth is expected to be weak to nonexistent this year.

Much of the reason for this poor outlook is a sharp drop in businesses' stated intentions to carry out capex.

Renaissance Macro

Historically, there is a strong correlation between capex intentions and actual shipments of durable goods over the next six months.

If intentions become reality this time as well, then business spending is set to decline sharply over the course of 2025.

But what if we get new trade deal announcements this year that allow tariff rates to fall?

Anything more than talks and preliminary agreements strike us as unlikely to be forthcoming anytime soon. It should be noted that trade deals typically take a very long time to materialize.

Torsten Slok

And this only looks at bilateral trade deals. Multilateral trade deals (involving more than two countries) typically take even longer.

Given the CCP's threats to retaliate against any country that makes a trade deal with the US that is detrimental to China, most countries' governments are likely to move slowly and deliberately when it comes to trade agreements with the US.

In short: Don't expect the cloud of uncertainty around trade to disappear anytime soon.

2. Paycheck-to-Paycheck Consumer Pain