A wave of anxiety is washing over the American economy as 2025 unfolds. Just a year ago, the outlook leaned optimistic. Today, that confidence appears to be unraveling. One by one, major financial institutions are abandoning their guarded hope and issuing stark warnings: a recession may no longer be avoidable unless something changes—and soon.
The first quarter has delivered a drumbeat of downward revisions to economic forecasts, each more severe than the last. J.P. Morgan now pegs the likelihood of a recession at 60%, a notable jump from its earlier 40% estimate. The bank points to what it calls “disruptive U.S. policies,” specifically the recent wave of trade tariffs, as the most serious threat to global economic stability. Their analysts warn that the current approach to trade has become “less business friendly,” with retaliation from trading partners, eroding confidence, and supply chain shocks all amplifying the risk.
Apollo Global Management offers an even more unsettling projection. Citing trade miscalculations, Apollo’s chief economist, Torsten Sløk, places the odds of a downturn at 90%. He labels the situation a “Voluntary Trade Reset Recession,” arguing that tariffs have been executed in ways that destabilize more than protect. According to Sløk, the US might now be steering into recession by design rather than misfortune.
Goldman Sachs has revised its own forecast twice in rapid succession. After lifting its recession odds from 20% to 35%, Goldman pushed the number to 45% in early April as tariff tensions escalated further. At one point, its internal models even entertained probabilities as high as 65% before some tariff rollbacks prompted a retreat in pessimism. Yet the damage to expectations had been done: Goldman cut its 2025 growth projection to just 1.3%, citing sharply worsening conditions.
They’re not alone. S&P Global Ratings has nudged its recession probability to 30–35%, up from 25% just weeks ago. Barclays, Deutsche Bank, UBS, and Bank of America have all followed suit with similar caution. By mid-April, at least seven major banks had updated their models to reflect a bleaker year ahead. Several now expect growth to flatline, and some foresee contraction before the year is out.
What started as a handful of cautious voices has become a nearly unanimous drumbeat. Analysts warn that the speed and scale of this shift in sentiment, where forecasts swing from cautious optimism to deep unease within weeks, are almost without precedent in recent decades. And investors are reacting. The Russell 2000, a key gauge of America’s economic pulse, now implies an 80% chance of recession, its sharp drop revealing a recalibration of expectations. Put plainly, Wall Street no longer sees a downturn as a possibility. It sees one closing in. And the real question now? What, exactly, has turned the tide so suddenly?
Tariff Shock and Trade War Turmoil
A major factor behind the gloom is the shift in US trade policy that continues to unfold. In a bid to “reset” global trade terms, the new administration in Washington has moved aggressively to impose sweeping import tariffs. President Donald Trump’s early-2025 tariff offensive—targeting dozens of countries and thousands of products—has proven to be an economic game-changer. Almost overnight, the decades-long paradigm of ever-freer trade has been thrown into reverse. While many have applauded the goal of defending American industries and negotiating fairer terms, the speed and scale of the tariff implementation have rattled business leaders and economists alike.
It’s not that experts disagree with the idea of pushing for better trade deals. Apollo’s Torsten Sløk acknowledges the administration “is not wrong to want to adjust the terms of trade to position the US fairly.” The concern lies in how the tariffs were introduced: abruptly, without exemptions, and with no gradual phase-in.”Implementing extremely high tariffs overnight hurts many businesses,” Sløk warns, and it risks turning a policy aim into a self-inflicted wound. The tariffs, he explains, hit American companies on two fronts: raising costs (fueling inflation) and disrupting supply chains (hurting growth). Together, these create a recipe for stagflation, the very scenario that haunted the 1970s.
Perhaps nowhere is the impact of this trade turmoil more palpable than on America’s small businesses, the lifeblood of the economy. Smaller firms lack the pricing power and financial buffers that large multinationals have, leaving them vulnerable to sudden cost surges from tariffs. Apollo’s analysis shows that small and medium-sized enterprises account for over 80% of US employment and capital spending.
These businesses tend to run on thin margins. Many are unable to afford a hefty new tax on the inputs and inventory they import. If they have to pay a 15% or 25% tariff at the port before they can even stock their shelves, many simply don’t have the working capital to do so. Sløk paints a dire picture of the fallout: “Small businesses that have for decades relied on a stable US system will have to adjust immediately and do not have the working capital to pay tariffs. Expect ships to sit offshore, orders to be canceled, and well-run generational retailers to file for bankruptcy,” he cautioned. In Apollo’s estimation, this sudden shock to small businesses and supply chains could shave as much as four percentage points off US GDP growth.
Early evidence shows that trade turbulence is already chilling real economic activity. Export orders are being slashed as foreign partners balk at unpredictable US terms. Ships are beginning to stack up at some ports as importers defer deliveries to see if tariff rules change again. And many family-run manufacturing and retail businesses around the country that survived through the 2020 pandemic and the 2022 inflation spike now find themselves on the brink of insolvency purely because of a policy shock outside their control. It’s a “voluntary“ recession risk, as Apollo calls it, meaning it stems from policy choices rather than an inherent economic imbalance. And that, paradoxically, is what makes it so hard to predict and hedge against with the usual tools.
The Signals Are Shifting: A Slowing US Economy Faces Mounting Pressure
The early tremors of a potential recession are no longer confined to analyst reports or market forecasts—they are beginning to show up in the data itself. What began in 2025 as a steady, cautious economic expansion is now showing signs of fatigue. The indicators that economists and policymakers rely on, from inflation and employment to consumer sentiment and financial markets, are beginning to falter. Each, in its own way, is flashing a warning light. Together, they suggest a broader slowdown that may already be underway.
Inflation: A Short-Lived Victory?
On the surface, inflation data has offered a moment of relief. Consumer prices in March rose just 2.4% year-over-year, down from February’s 2.8% rate. Even more striking, the Consumer Price Index (CPI) dipped by 0.1% month-over-month as energy prices cooled. After years of aggressive interest rate hikes and policy tightening, this drop should have marked a milestone—a signal that the Federal Reserve’s inflation battle was finally paying off. But that optimism may prove fleeting.
Behind the headline figures lies a growing concern that the easing of price pressures could soon reverse. Economists warn that the newly imposed tariffs are poised to reintroduce inflationary pressures across key categories of goods, especially those that depend heavily on imports. A mid-April Reuters poll revealed that inflation expectations have already shifted upward, with many forecasters now anticipating sustained price growth well above the Fed’s 2% target for the foreseeable future.
Even Fed Chair Jerome Powell has acknowledged the risk. Speaking in early April, he cautioned that recent trade moves risk “pushing inflation…further from the central bank’s goals”, particularly as they begin to ripple through consumer prices. The fear is that this dip in inflation may not be a turning point but a brief pause that precedes another wave of rising costs. For American households, many of whom are still reeling from the cost-of-living crisis of 2022, that prospect is especially troubling.
The Labor Market: Cracks Beneath the Surface
Heading into 2025, the job market was one of the economy’s bright spots. Unemployment hovered around 4%, and employers continued to hire at a robust pace. But that stability is beginning to erode. Beneath the headline numbers, small businesses—the core engine of American employment—are signaling distress. These firms, which employ approximately 80% of US workers, are facing rising input costs and sagging demand. Many have stopped hiring. Others have quietly started letting people go. Initial jobless claims, especially in states with heavy manufacturing exposure, have ticked upward in recent weeks.
Economists now believe that layoffs could accelerate as the year progresses. The Federal Reserve’s own staff acknowledges that unemployment may climb if economic growth continues to soften. Manufacturing surveys are already showing contraction. Reports of factory furloughs, particularly in industries hit hard by tariffs like auto components and consumer electronics, are becoming more frequent. What’s unfolding is a quiet reversal in labor momentum. And if job losses mount, consumer spending—the very fuel of the US economy—could falter.
Confidence Collapsing: Consumers Pull Back
Confidence among American consumers has taken a sudden, sharp hit. In April, the University of Michigan’s consumer sentiment index fell to 50.8, its lowest reading since the summer of 2022. Just a month prior, it stood at 57.0. The speed of this decline suggests not a gradual erosion of optimism but a shock event, likely driven by the tariff surge and market turbulence.
Households are growing wary. Inflation may be easing for now, but with the looming threat of higher prices and uncertainty surrounding trade policy, Americans are beginning to cut back. Retailers report that discretionary purchases—furniture, electronics, and home upgrades—are slowing. Home sales are down, and travel plans are being canceled.
As one ING economist put it, “Prices, jobs, and wealth are all moving against the consumer—and that is a pretty toxic combination.” When sentiment falls this fast, it often precedes a pullback in household spending. And when enough families start saving instead of spending, it can tip an already fragile economy into a full-blown downturn.
Markets Reflect the Stress
Financial markets, typically a forward-looking barometer of economic health, have also taken a bruising. The S&P 500 dropped more than 8% during the first quarter. That’s not just a bad quarter; it’s a sharp reversal from the gains posted in late 2024 when markets had rallied on hopes of pro-growth policies. The Russell 2000, which tracks small-cap stocks, has fallen even more steeply. Given its close ties to small businesses, “a mild recession is almost 100% priced in,” said JPMorgan strategist Nikolaos Panigirtzoglou.
Russell 2000 Index
Source: CNBC
Bond markets, too, are flashing familiar warning signs. After briefly surging on inflation fears, yields on long-term Treasuries have fallen as investors pile into safe-haven assets. Even the US dollar, typically a safe harbor in global crises, is being scrutinized. The financial tremors are not confined to Wall Street. They ripple outward, affecting household wealth through retirement accounts and investment portfolios. They influence borrowing costs and business confidence. And they can reinforce the very slowdown that investors fear, creating a negative feedback loop between perception and reality.
Everything Slowing, All at Once
Taken together, these shifts tell a sobering story. The US economy isn’t collapsing, but it’s hard to deny that it’s downshifting rapidly. The energy that carried it into the new year is dissipating, and in its place: caution, retrenchment, and growing pessimism. The median forecast from economists surveyed by Reuters now predicts GDP growth of just 1.4% for 2025, a sharp downgrade from 2.2% only a month earlier. What’s perhaps most unsettling is how swiftly this outlook changed. Only weeks ago, many believed the US might achieve a soft landing: easing inflation, stable jobs, and modest growth. Now, that hope feels distant. In its place is a pressing question: What happens next if this is just the beginning of the slowdown?
A Federal Reserve on the Edge
As the US economy teeters between conflicting threats, the Federal Reserve has found itself caught between a rock and a hard place. After a year of interest rate hikes aimed at containing inflation, the Fed entered 2025 in pause mode, hoping to stabilize without triggering a deeper slowdown. But new shocks have disrupted that plan. The central bank now faces a dual threat: faltering growth on one side and resurgent inflation on the other.
Experts say this isn’t a typical policy puzzle. It’s a potential return to stagflation, where inflation stays stubbornly high even as the economy weakens. Minutes from the Fed’s March meeting revealed a rare consensus showing that the balance of risks had sharply deteriorated. Officials spoke openly of the painful tradeoffs ahead. Slower growth may demand stimulus, but persistent inflation, driven in part by sweeping new tariffs, could make rate cuts dangerously premature.
In normal times, the Fed would lean into a slowdown by easing rates to spur borrowing and investment. And markets have been betting that a pivot to rate cuts is coming. But the Fed is pushing back. Policymakers have voiced concern that acting too soon could reignite the very inflation they’ve worked to suppress. “You’re getting risk on both sides materializing,” said St. Louis Fed President Alberto Musalem about tariff-driven price increases amid plummeting equities. His colleague, Minneapolis Fed President Neel Kashkari, echoed that view—saying it “risky” to assume the inflation spike will fade on its own. That leaves the Fed caught in a precarious balancing act. Cut rates to support growth, and they may stoke inflation. Hold steady, and the economy could stall on its own. Either choice comes with costs.
Behind closed doors, the mood is even more somber. Fed officials have admitted that the odds of a so-called “soft landing” are fading. A nightmare scenario has quickly unfolded, where the economy is slowing under the weight of higher prices, yet it cannot rely on monetary easing for relief. If the Fed acts, it risks undermining its inflation-fighting credibility. If it doesn’t, the slowdown could snowball into a recession. Many experts agree that there’s no easy way out.
Markets, once hopeful for a dovish turn, are now recalibrating. Fed officials have made clear that the threshold for action remains high. “If you’re driving in really dense fog, there are two things you don’t want to do. And one is to step on the gas because you don’t know who’s in front of you,” said Richmond Fed President Thomas Barkin. Kashkari went further, warning that the bar to either “cut or hike rates is high” and that any policy move would need decisive evidence.
While this restraint has frustrated investors, it reflects the gravity of the situation. Policymakers are preparing for the worst while hoping not to act prematurely. They’re modeling downturns, weighing coordinated responses, and bracing for volatility. But they’ve also made it clear that if a recession strikes, monetary policy may not save the day in time.
From Hope to Hesitation
The opening months of 2025 have brought a sobering shift in sentiment. The optimism that buoyed markets late last year has withered, replaced by a heavy sense of uncertainty. Apollo Global’s stark warning—a 90% chance of recession without swift policy correction—no longer sounds like speculation. It feels like a blaring alarm. When institutions as entrenched as J.P. Morgan and Goldman Sachs begin cutting growth projections and urging restraint, it is difficult to deny the risk hanging over the economy.
Today, Americans stand suspended between two poles: hope that past resilience and policy course correction might avert disaster, and fear that we are watching a slow-motion derailment that could have been avoided. What happens next will likely determine whether the US can swerve away from a recession or slide into one. The indicators are flashing, consumer activity is slowing, and businesses are pulling back. Financial conditions have tightened, and with the Federal Reserve constrained by inflation risks, monetary rescue may not arrive fast enough.
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