The U.S. economy was on relatively solid footing heading into 2025, but a ramping trade war and aggressive government layoffs have shaken up the economic outlook.
The Federal Open Market Committee (FOMC)’s latest long-term economic projections from March still suggest a soft landing for the U.S. economy that includes slowing gross domestic product growth but no recession. However, the Donald Trump administration and its Department of Government Efficiency (DOGE) have implemented bold and controversial policy measures, making the next several months a critical period for the economy. Labor market conditions have remained resilient so far, but a growing number of economists are anticipating negative U.S. GDP growth in the first quarter. The Federal Reserve has also paused its interest rate cuts and is facing a difficult balancing act in 2025.
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Economic recessions are no reason for panic and have been a regular occurrence over the past century. However, investors can make the most of a difficult situation by knowing which risk factors to watch and how to position their portfolios to optimize their performance if a recession is looming in 2025:
— 2025 recession risk factors.
— Will there be a recession in 2025?
— What to invest in during a recession.
2025 Recession Risk Factors
There are many factors that can trigger or contribute to a recession, but three specific factors are likely the biggest risks to economic stability in 2025.
The primary economic risk factor in 2025 is tariffs. In the first few months of his second term, President Trump has already implemented and threatened to implement aggressive tariffs on goods imported from China and other U.S. trade partners around the world, making tariffs a central part of his economic plan.
Trump has implemented a 10% baseline tariff on almost all goods imported to the U.S. On April 9, Trump implemented custom tariffs on what the White House deems the “worst offenders,” such as a 46% tariff on Vietnam and a 104% tariff on China. Just hours after these latest tariffs went into effect, Trump announced he would be delaying them by 90 days.
Not surprisingly, U.S. trade partners have retaliated by issuing their own tariffs on U.S. exports. Trump has been extremely fluid in his trade war policies, implementing, delaying and threatening new tariffs on a weekly basis as other nations react.
Supporters of Trump’s tariff strategy say it will help U.S. businesses compete with lower cost international businesses and encourage American companies to hire U.S. workers and choose to manufacture goods domestically. However, critics of the tariff strategy argue tariffs will force U.S. companies to pay higher prices for imported goods and components, and many of these companies will simply pass on those higher costs to consumers by raising prices. Widespread price hikes could be a nightmare scenario for an economy that is already dealing with elevated inflation.
Any investor who hasn’t been living under a rock for the past three years is already aware that inflation is another economic risk factor in 2025.
The Federal Reserve has made significant progress in bringing down inflation, but the latest core personal consumption expenditures (PCE) price index reading for February suggests inflation remains elevated. Core PCE, which excludes volatile food and energy prices and is the Fed’s preferred inflation measure, was up 2.8% year-over-year in February, above the FOMC’s 2% target.
In its latest long-term economic projections in March, the FOMC called for only two 25-basis-point rate cuts in 2025, bringing the fed funds target range down to between 3.75% and 4% entering 2026. However, the bond market is pricing in a greater than 70% chance the FOMC cuts rates at least three times by the end of 2025.
A third economic risk factor is the Trump administration’s DOGE, led by Tesla Inc. (ticker: TSLA) CEO Elon Musk. DOGE has already cut an estimated 222,000 government jobs in an effort to reduce wasteful spending. In addition, DOGE has cut more than 7,200 government contracts. DOGE estimates it has saved American taxpayers more than $150 billion, but those savings (sometimes dubiously calculated) may come at a cost. Government layoffs will contribute to U.S. unemployment, reduce consumer spending and weigh on GDP growth. In addition, private companies who have lost government contracts could respond with their own layoffs, compounding the problem.
[READ: De-Dollarization: What Would Happen if the Dollar Lost Reserve Currency Status?]
Will There Be a Recession in 2025?
Fortunately, inflation and tariffs have not yet dragged down the U.S. economy, but investors should continue to monitor the labor market and other economic data in the coming months.
The U.S. economy added 228,000 jobs in March, but the U.S. unemployment rate ticked higher to 4.2%. U.S. GDP growth dropped from 3.1% in the third quarter of 2024 to 2.3% in the fourth quarter. The latest Federal Reserve economic projections suggest that growth will slow to an annual rate of 1.7% in 2025.
U.S. household debt hit a record $18.04 trillion in February, including a record-high $1.21 trillion in credit card debt. Concerns over Trump’s unpredictable policymaking recently sent U.S. consumer sentiment to its lowest level since November 2022. A 4.2% unemployment rate is not historically high, but it is well above 2023 lows of 3.4%.
The S&P 500 gained nearly 10% the day Trump announced he would be delaying his higher tariffs by 90 days. But Chris Zaccarelli, chief investment officer at Northlight Asset Management, says investors aren’t truly out of the woods until Trump reaches new tariff deals across the board.
“The administration has finally shown flexibility on their approach to global trade — but we are still cautious because there hasn’t been a full pivot, just a 90-day reprieve. Clearly, if deals start getting done then that’s a move in the right direction, but if three months go by and little progress is made on the trade front then we may find ourselves right back where we started, with global markets in freefall,” Zaccarelli says.
Zaccarelli isn’t the only one concerned about the Trump administration’s economic impact. Even after its tariff pause relief rally, the S&P 500 is down 9% overall in 2025. The New York Fed’s recession probability model suggests there is a 30% chance of a U.S. recession sometime in the next 12 months. The Atlanta Fed’s GDPNow model is calling for U.S. GDP to decline 2.4% in the first quarter of 2025.
Skyler Weinand, chief investment officer at Regan Capital, says U.S. inflation data will be critically important in the next several months.
“Whether tariffs are in place or not, we see corporations and consumers pulling back on spending and companies now essentially have a green light to raise prices,” Weinand says. “Inflation and overall elevated prices are not going away,” he says.
What to Invest in During a Recession
There are several general strategies investors can use to manage risk and take advantage of opportunities should the U.S. slip into a recession in 2025.
First, consider reducing exposure to volatile stocks and increasing cash holdings. Cash may not be the most exciting play, but it reduces market risk and provides financial flexibility if a recession creates potential buying opportunities in 2025. In addition, investors can still earn more than 4% interest on a one-year certificate of deposit right now, potentially locking in that yield even if the Fed resumes cutting rates.
Some stocks and market sectors are more defensive than others and tend to outperform the rest of the market during recessions. Utility stocks, health care stocks and consumer staples stocks are considered defensive investments because their earnings tend to be insulated from economic cycles and swings in consumer confidence.
In addition, certain individual stocks have outperformed during each of the past two U.S. recessions. Walmart Inc. (WMT), Netflix Inc. (NFLX) and T-Mobile Inc. (TMUS) are just three examples of stocks that beat the S&P 500 in both 2008 and 2020.
Investors with longer-term financial goals have another alternative as well — simply ignore a recession and stay the course.
Chris Brigati, chief investment officer at SWBC, says recession risks also create opportunities for long-term investors.
“Markets correct and adjust over time as exogenous shocks occur,” Brigati says.
Since 1946, the S&P 500 has dropped an average of 32% from its highs during bear markets but has taken an average of just 23 months to fully recover those losses.
“Ultimately, this situation, while painful for invested assets, offers some opportunities to invest at lower valuations, and eventually the market will recover and investors will be rewarded,” Brigati says.
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Recession 2025: What to Watch and How to Prepare originally appeared on usnews.com
Update 04/14/25: This story was published at an earlier date and has been updated with new information.
