Tariffs Push US Economy Toward Recession Risk in 2025

The U.S. economy stands at a pivotal moment, with experts warning of a potential downturn in 2025 driven by new tariffs and persistent uncertainty. Citigroup’s chief economist, Nathan Sheets, estimates a 40-45% chance of a recession, pointing to trade policies as a key catalyst. Unlike the stagflation fears that have lingered since post-pandemic price spikes, Sheets argues a traditional recession, marked by slowing growth without runaway inflation, is the more likely outcome.

Recent data paints a mixed picture. Inflation has eased to 2.4% in March 2025, its lowest since October 2024, offering some relief to consumers. Yet, the introduction of a 10% tariff on Chinese imports and higher duties on steel and aluminum threatens to reverse this progress, potentially raising costs for businesses and households. The Federal Reserve, cautious amid these shifts, has signaled a delicate balancing act to manage growth and price pressures.

For everyday Americans, the stakes are tangible. A recession could mean job losses, tighter budgets, and delayed dreams, while rising prices from tariffs might squeeze wallets further. This article unpacks the forces shaping the U.S. economy, drawing on expert insights and diverse perspectives to explore what lies ahead.

The Trump administration’s tariffs, enacted in early 2025, are at the heart of recession concerns. Sheets projects their biggest impact in the second half of the year, as higher import costs ripple through supply chains. He describes the tariffs as a stagflationary shock, capable of slowing growth while nudging prices upward. However, he views a conventional recession as more probable, with economic contraction outpacing inflationary surges.

Other economists offer varied outlooks. Torsten Slok of Apollo estimates a 90% recession probability if tariffs persist, warning of a potential 4% drop in GDP. JPMorgan pegs the odds at 60%, while Goldman Sachs, citing a temporary tariff pause, lowers its estimate to 45%. The International Monetary Fund (IMF) has raised its U.S. recession risk to 37%, up from 25% earlier in 2025, reflecting trade tensions and policy uncertainty.

Businesses are already feeling the strain. Many companies have delayed hiring or investment, wary of rising costs and unpredictable trade policies. For consumers, higher prices for goods like electronics, clothing, and cars could erode purchasing power, even as wage growth has outpaced inflation in recent months.

Inflation’s recent slowdown offers a glimmer of hope. The Consumer Price Index rose just 0.1% month-over-month in March 2025, with annual inflation dropping to 2.4%, driven by falling energy prices. Gasoline prices fell 3.1% year-over-year, and fuel oil declined 5.1%. Core inflation, excluding volatile food and energy, eased to 3.0%, its lowest since April 2021.

Yet, risks loom. Food inflation rose to 2.6%, and consumer expectations for future price increases climbed to 3.6%, the highest since October 2023. Analysts at Morgan Stanley and Goldman Sachs have revised 2025 inflation forecasts upward, citing tariffs as a key driver. The IMF projects U.S. inflation to average 3% in 2025, a percentage point higher than earlier estimates, due to trade policies and persistent service sector pressures.

For workers, real wage gains, with weekly wages rising 3.2% against 2.4% inflation, have provided some cushion. However, planned minimum wage hikes in 21 states and 48 cities in 2025 could raise labor costs, potentially fueling price increases in certain sectors.

The Federal Reserve faces a complex challenge. With the benchmark interest rate steady at 4.25-4.5% since January 2025, the Fed has paused after cutting rates by 100 basis points since September 2024. Chair Jerome Powell has signaled two more cuts in 2025, aiming for a year-end rate of 3.9%, but emphasized caution due to tariff-driven inflation risks.

Powell’s stance reflects a broader dilemma. Rapid rate cuts could spur growth but risk reigniting inflation, while keeping rates high might deepen the slowdown. President Trump has urged faster cuts, warning of economic stagnation, but the Fed insists on data-driven decisions, prioritizing price stability and employment.

Historically, the Fed has navigated similar tensions. In the 1980s, aggressive rate hikes tamed inflation but triggered recession. Today, with inflation moderating and growth faltering, the Fed’s cautious approach aims to avoid repeating past mistakes while addressing new trade-related pressures.

The U.S. slowdown has global implications. The IMF forecasts world GDP growth to fall to 2.8% in 2025, down from 3.3% in 2024, with global trade growth plummeting to 1.7%. China’s growth is expected to slow to 4%, and the eurozone to just 0.8%, as U.S. tariffs disrupt supply chains and dampen investment.

Retaliatory measures from trading partners have heightened risks. The IMF warns of increased financial market volatility and vulnerabilities in emerging markets, where capital flows could dry up. Historically, protectionist policies, like those in the 1930s, deepened global downturns, and today’s trade reset echoes those dangers.

Despite these challenges, the U.S. remains a global growth engine. Its projected 1.8% growth in 2025, though lower than prior estimates, outpaces many peers. Still, policy uncertainty and trade fragmentation threaten long-term prosperity, both at home and abroad.

The U.S. economy faces a delicate path. While inflation has eased and the labor market remains resilient, with 228,000 jobs added in March 2025, rising layoffs and an unemployment rate of 4.2% signal caution. Tariffs, policy uncertainty, and global trade tensions amplify the risk of a recession, with economists’ estimates ranging from 37% to 90%.

For Americans, the coming months will test resilience. Policymakers, businesses, and consumers must navigate higher costs, potential job market shifts, and an uncertain global landscape. The Fed’s steady hand, combined with clear trade and fiscal policies, will be critical to avoiding a deeper downturn while sustaining recent economic gains.