Recession Risk In Autumn 2025 Rising With Tariff Uncertainty

Recession risk has dropped from April according to many economists, including J.P. Morgan and economists surveyed by The Wall Street Journal. I am not forecasting a recession now (late July 2025), but the risk rises as tariff uncertainty continues. There are plenty of small negatives which do not add up to a recession. The recession risk comes from the continued back-and-forth from the White House about what tariffs will be.

The economy was well balanced ending 2024. Inflation had dropped, though still a little above the Federal Reserve’s target. Employment gains were solid, leading the Fed to pause on its interest rate reductions. All looked fairly predictable, and then the second Trump administration changed policies significantly.

On tariffs, we need to distinguish between two effects. One is the tariffs themselves, and the other is continued uncertainty about what tariffs will be. My crystal ball does not show what the president will decide, once and for all, about tariffs. My best estimate is that by the end of summer all of the major tariff issues will be settled. With that assumption, I do not forecast recession. Let’s roll through that reasoning first, then consider what happens if tariff uncertainty continues through the autumn.

Tariffs will reduce the purchasing power of consumers, which will reduce spending on discretionary purchases. Some layoffs will occur, partially offset by increased production of domestic products. However, the economy will not fall into a recession. Most of the economy is not sensitive to our tariffs nor retaliatory tariffs, so business will mostly continue as usual.

Two other worries do not hurt enough to push the economy into recession. Stepped-up immigration enforcement is slowing the expansion of the labor force, and in some cases reducing current employment. Agriculture and construction are the hardest-hit sectors, with smaller effects in food service and hotels. This will increase business costs, but the magnitude relative to the entire economy will be small.

Medicaid cuts in the One Big Beautiful Bill have made headlines, but the cuts are from projected spending levels, not actual spending. Medicaid spending will increase annually by about three percent, roughly in line with inflation plus population growth.

With employment not suffering much and inflation still above the Fed’s target, interest rate cuts are unlikely with this assumption of tariff resolution by the end of summer. Financial markets and Fed officials expect two more cuts of a quarter-point each in 2025. I am doubtful, because the Fed is likely to wait until it sees actual employment drops, which seems unlikely now.

But what if tariffs do not get settled by the end of summer? That’s what would lead the U.S. economy into recession. News reporters have told stories of businesses delaying capital spending decisions because of uncertainty about tariffs. Some companies are also delaying hiring to fill open positions because of tariff uncertainty. And some consumers fear how tariffs will impact their jobs and are delaying discretionary purchases. So far these are anecdotes that have not shown up in the official statistics. But the risks are real.

If summer turns to fall and businesses still don’t know what U.S. tariffs and foreign tariffs will be, the anecdotes of delayed spending decisions will turn into data. Spending will drop enough that the country will fall into a mild recession. But the economy won’t spiral downward too far, because so much of America’s spending and production is unaffected by tariffs. The magnitude of a tariff-uncertainty recession would be roughly one-half the usual loss of corporate profits and jobs. For comparison, the 2008-09 recession was twice as bad as usual.

With employment falling, the Fed would certainly cut interest rates. The total eventual cuts would be one percentage point for a short-lived recession, or two points if tariff uncertainty continues well into 2026.

Economic analysis cannot help us figure out which of these scenarios will come to pass. Whether we go into recession or not depends on whether the president settles the tariff issue or continues to change his demands and offers.

In this uncertain environment, business leaders should develop plans for both an economy with continued growth and a recession. My gut instinct says the odds are 60-40 in favor of no recession, but anyone can adjust their numbers based on their own reading of what White House strategy will be.

A base case scenario would have continued increases in spending and production at about the recent pace, but with slower growth of the low-skilled labor force and slightly reduced purchasing power of consumers.

The recession alternative plan should assume less corporate spending on capital goods and lower consumer spending on discretionary purchases. After tariff uncertainty is over—or mostly over—look for a partial rebound. The rebound occurs because both businesses and consumers will spend the money that they had previously held back. But it will be only a partial rebound, because some opportunities will be lost forever.

In either scenario, business challenges and opportunities will come more from specific markets and production opportunities than the overall economy and recession.