Potential economic downturn looming in fall of 2025 due to uncertainty over tariffs
The Federal Reserve is prepared to cut interest rates if a recession occurs, with a total eventual cut of one percentage point for a short-lived recession, or two points if tariff uncertainty continues into 2026.
The uncertainty surrounding tariffs has significant adverse impacts on consumer spending, hiring decisions, and overall economic growth.
Consumer Spending
Tariffs, even at a baseline 10%, contribute to higher consumer prices by increasing the cost of imported goods. This leads to elevated core consumer inflation, such as forecasted at 3.7% in the second half of 2025, which constrains consumer purchasing power and dampens spending.
Hiring Decisions
Trade policy uncertainty increases the perceived risks for businesses, making firms more cautious about investing and hiring. The uncertainty over future tariff levels encourages companies to delay or scale back workforce expansion plans due to concerns about costs and market demand. This is reflected in projections of a rising U.S. unemployment rate if tariffs escalate.
Overall Economic Growth
Prolonged tariffs and the uncertainty surrounding trade policies are expected to slow economic growth. In base forecasts, slow growth is expected with tighter financial conditions maintained by the Federal Reserve due to inflation pressure from tariffs. Under more adverse scenarios, a reset to higher tariffs could induce a mild recession, with GDP contraction around 0.5% in late 2025 and elevated inflation reaching 4.1%.
The speaker does not foresee a recession if all major tariff issues are settled by the end of summer. However, if tariff issues remain uncertain by the end of summer, spending could drop enough to cause a mild recession.
In an uncertain environment, business leaders should develop plans for both an economy with continued growth and a recession. After tariff uncertainty is over or mostly over, there will be a partial rebound in spending and production.
Inflation had dropped, though still above the Federal Reserve's target. The odds of no recession are estimated to be 60-40, but this can be adjusted based on one's reading of White House strategy.
Employment gains were solid, leading the Fed to pause on its interest rate reductions. The economy was well balanced at the end of 2024.
If summer turns into fall and U.S. tariffs and foreign tariffs remain uncertain, spending could drop enough to cause a mild recession. In this uncertain environment, business challenges and opportunities will come more from specific markets and production opportunities than from the overall economy and recession.
Medicaid spending will increase annually by about three percent, roughly in line with inflation plus population growth. The recession alternative plan assumes less corporate spending on capital goods and lower consumer spending on discretionary purchases.
J.P. Morgan and economists surveyed by The Wall Street Journal have stated that the risk of recession has dropped from April. However, the risk of recession rises due to continued tariff uncertainty.
In conclusion, prolonged tariff uncertainty creates an environment of economic slack, higher unemployment, and slower growth driven by trade policy uncertainty in the U.S. economy through 2025 and potentially beyond. Business leaders should be prepared for both scenarios and develop strategies accordingly.
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- Tariff uncertainty, due to political decisions such as those made by President Trump, can negatively affect business matters like capital spending and hiring by creating market instability, causing companies to delay or scale back expansion plans.
- The continued uncertainty over tariffs could have far-reaching effects on the general economy, leading to a significant decrease in consumer spending, particularly on discretionary purchases, as rising inflation and market unpredictability reduce consumers' purchasing power.
