The U.S. economy was on relatively solid footing heading into 2025, but a trade war and renewed inflation fears have shaken up the economic outlook.
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The Federal Open Market Committee’s (FOMC) latest long-term economic projections from March still suggest a soft landing for the U.S. economy that includes slowing GDP growth but no recession. However, the Donald Trump administration has implemented bold and controversial policy measures, making the next several months a critical period for the economy. Labor market conditions have remained resilient up to this point, but U.S. GDP growth dropped into negative territory in the first quarter. The Federal Reserve has also paused its interest rate cuts and is facing a difficult balancing act moving forward.
Economic recessions are no reason for panic and have happened regularly over the past century, but you can make the most of a difficult situation by knowing which risk factors to watch and how to position your portfolio if you’re worried about a recession 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 implemented and threatened more 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 enacted custom tariffs on what the White House deems the “worst offenders,” such as a 46% tariff on Vietnam and a 49% tariff on Cambodia. Just hours after these 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 targeted China with a 145% tariff rate, to which China responded by raising tariffs on U.S. goods to 125%. In May, China and the U.S. agreed to cancel some of these tariffs and suspend others for 90 days while trade negotiations continue. 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. Critics of the tariff strategy argue tariffs will force U.S. companies to pay higher prices for imported goods and components, however, 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 two years is already aware that inflation is another economic risk factor in 2025.
[Read: 7 Best Europe ETFs to Buy for 2025]
The Federal Reserve has made significant progress in bringing down inflation, but the latest core personal consumption expenditures (PCE) reading in late May suggests inflation remains elevated. Core PCE, which excludes volatile food and energy prices and is the Fed’s preferred inflation measure, was up 2.5% year over year in April, above the FOMC’s 2% target. Another inflation measure, the core consumer price index, rose 2.8% in May.
In its latest long-term economic projections in March, the FOMC called for only two 25-basis-point rate cuts in 2025, which would bring the fed funds target range down to between 3.75% and 4% entering 2026. The bond market is pricing in about a 66% chance the FOMC cuts rates at least two times by the end of 2025.
A third economic risk factor is general uncertainty about Trump administration policies. When businesses and consumers are unsure about policies on taxes, tariffs and geopolitical conflicts, they tend to delay and reduce spending and investment until they have a clearer outlook.
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.
The U.S. economy added 139,000 jobs in May, and the U.S. unemployment rate remained at 4.2%. U.S. GDP figures went from 2.4% growth in the fourth quarter to a 0.2% drop in the first quarter. The latest Federal Reserve economic projections suggest full-year U.S. GDP growth of just 1.7% in 2025.
U.S. household debt hit a record $18.2 trillion in the first quarter, including $1.18 trillion in credit card debt. U.S. consumer sentiment dropped to its second-lowest level in history in May, while year-ahead consumer inflation expectations jumped to 7.3%. Moody’s downgraded its rating on U.S. sovereign debt from Aaa to Aa1 in May, citing concerns over the growing federal deficit and interest owed on U.S. national debt.
Despite all the economic uncertainties, the S&P 500 has rebounded in recent weeks and is now up 2.6% this year through June 10.
Nigel Green, CEO of deVere Group, says the combination of a solid labor market and the possibility of a tariff-fueled rebound in inflation will force the Federal Reserve to continue to delay interest-rate cuts for the foreseeable future.
“That delay carries consequences — particularly for interest-rate-sensitive assets like tech stocks, growth sectors and riskier emerging markets that had been pricing in easier policy,” Green says.
He says over-leveraged market sectors are also vulnerable to rate cut delays.
“Commercial real estate, consumer credit and regional banks — already under stress — could soon find the environment more difficult than many are anticipating,” Green says.
The New York Fed’s recession probability model suggests there is a 28% chance of a U.S. recession sometime in the next 12 months. JPMorgan estimates recession probability at 40% in 2025, citing the potentially negative impact tariffs could have on consumer sentiment and economic growth. Goldman Sachs estimates U.S. recession odds at 35% and is forecasting just 1% U.S. GDP growth in 2025.
Clark Bellin, president and chief investment officer at Bellwether Wealth, says investors shouldn’t get too optimistic about falling inflation just yet.
“It’s encouraging that the inflation data has softened in April, especially as we brace for the potential for higher inflation over the coming months as tariffs work their way through the economy,” Bellin says.
“Even though the tariff levels ended up being smaller than feared, we still have tariffs and tariffs are likely to add to inflation.”
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. (ticker: WMT), Netflix Inc. (NFLX) and T-Mobile US 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.
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.
James Demmert, chief investment officer at Main Street Research, says U.S. policy uncertainty and trade war fears have temporarily disrupted the artificial intelligence trade on Wall Street, but the underlying theme is alive and well.
“AI has proven to enhance productivity growth for the global economy and individual companies, and we are only in the early stages of the cycle,” Demmert says.
“In our view, trade policy may slow economic growth, but AI productivity should offset some of that headwind.”
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Recession 2025: What to Watch and How to Prepare originally appeared on usnews.com
Update 06/11/25: This story was published at an earlier date and has been updated with new information.
