US economy headed for a major recession in 2025?
Is America heading towards a recession? Well, it is often said that markets are forward-looking. If this is the case, the decline seen in the US stock market after Trump’s tariff announcements is concerning.
S&P 500 and Nasdaq, the two leading indices, spent some time in the correction zone after having crashed over ten percent from their recent highs. Another 10% fall takes them into the bear market territory.
Recession in 2025
The US recession gained attention after President Trump initiated the trade war by imposing tariffs on other countries. When asked if a recession is on the horizon in the United States, Trump responded affirmatively, citing the economy’s transformation.
Trump isn’t alone in accepting a recession ahead. U.S. Treasury Secretary Scott Bessent also did not rule out the possibility of recession when speaking media recently, flagging some near-term economic turbulence as the Trump administration carries out its agenda. Bessent said there are ‘no guarantees’ there will not be a US recession.
Is the US economy Slowing Down
Let’s look at the real data to see how is American economy faring. Before that, here’s what OECD reports say – Annual real GDP growth in the United States is projected to slow from its very strong recent pace to 2.2% in 2025 and 1.6% in 2026
Inflation Expectations: Starting with inflation, both US CPI and PPI showed a falling trend in February. However, US consumers are sensing a rise in inflation in the year ahead. The University of Michigan’s consumer sentiment index fell to a preliminary reading of 57.9 in March, the third consecutive monthly drop and the lowest reading since November 2022. It also showed that US citizens are expecting inflation to touch 4.9% one year from now.
Consumer Spending: Consumer spending is another area that is looking weak. US shoppers increased spending but only a bit in February after a sharp drop the previous month. Retail sales rose only 0.2 percent in February, after a sharp drop of 1.2 percent in January. This could mean US consumers are becoming more cautious in their shopping behaviour due to economic concerns.
US Business Index: US businesses are slowing down their activity. S&P Global US Services Purchasing Managers’ Index shows the slowest output growth for 14 months in February. The order book growth and backlog growth have dipped, indicating potential global growth weakness in March.
US Manufacturing Index: The US manufacturing sector also seems to be slowing down. The ISM Manufacturing PMI decreased to 50.3 in February 2025, below forecasts, due to slower growth in the manufacturing sector due to eased demand, production stabilization, and continued destaffing.
GDP Growth Rate Expectations: The Atlanta Fed is now predicting an actual drop in GDP growth for the first quarter. The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the first quarter of 2025 is -2.1 percent on March 17, down from -1.6 percent on March 7.
US Fed Rate Cuts: The Federal Reserve has expressed a greater concern for inflationary risks than growth risks. It means, US businesses may continue to see higher-for-longer rates. With the economy showing signs of weakness, a delayed rate cut scenario could further dampen the situation.
US Unemployment: The U.S. unemployment rate rose to 4.1% in February 2025, up from 4.0% in January. According to the Sahm Rule, when the three-month average unemployment rate rises more than a half percentage point from the minimum rate over 12 months, a recession is likely, followed by larger unemployment increases.
How is Recession Defined
Back in 2021-22, the US economy faced similar pressures. US GDP declined 1.6 percent on an annualized basis in the first quarter of 2022, followed by a 0.9 percent drop in the second quarter. However, even though a recession is typically defined as two consecutive quarters of economic contraction (declining real GDP), no recession was declared in the United States at the time.
The two-quarters of decreasing GDP definition is a guideline that does not formally define a recession. The National Bureau of Economic Research (NBER) Business-Cycle Dating Committee, which certifies and dates US business cycles, defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Summing Up
Trump’s tariff-led trade war, falling GDP growth rate, unemployment, declining consumer sentiments, and plummeting retail sales data are some of the elements pointing to a US recession. How these factors play out in shaping interest rates and the value of the dollar will, to a large extent, determine recessionary pressures in the US economy.