Economists’ median estimate for a U.S. recession over the next 12 months has leapt to 45%, marking the highest reading since December 2023. This dramatic uptick reflects mounting anxiety over the economic fallout of sustained tariff measures.
Only a month ago, forecasters saw recession odds of roughly one in four. The rapid shift underscores how quickly trade tensions can unsettle sentiment, transforming growth prospects in the world’s largest economy.
Brief Tariff Truce Fails to Soothe Markets
A 90‑day suspension of reciprocal levies offered little comfort as business sentiment remained deeply negative. Firms reported that the pause provided only fleeting relief, with uncertainty persisting amid new threats of tariff escalation.
Even with the temporary truce, surveys suggest companies are holding back on hiring and investment plans. The spectre of fresh duties—from steel to technology goods—continues to loom over boardroom decision‑making.
The median GDP forecast for 2025 has tumbled from 2.2% down to just 1.4%, reflecting sweeping downgrades across major Wall Street and Washington forecasters. Next year’s rebound is expected to be muted as well, with growth of only 1.5%.
This revision marks one of the steepest monthly adjustments since mid‑2022. Economists attribute the downward spiral to disrupted supply chains, higher import costs, and faltering global demand tied to tariff policies.
Inflation Fears Constrain Rate Cuts
Rising inflation expectations have clipped the Federal Reserve’s scope for easing. Most economists now believe no more than two quarter‑point rate reductions are feasible this year, as households and businesses brace for higher prices.
With core inflation measures staying stubbornly above target, policymakers face a delicate trade‑off: cutting too aggressively risks reigniting price pressures, while holding firm could deepen economic pain.
Federal Reserve officials have signalled an intention to maintain the federal funds rate between 4.25% and 4.50% at least through mid‑year. The central bank is waiting for clearer evidence on how tariff measures will reshape the outlook.
Speeches from regional presidents stress a cautious stance, reflecting concerns that further escalation could amplify both inflation and growth headwinds. The Fed’s “wait‑and‑see” posture contrasts with more activist leanings in earlier months.
Widespread Business Sentiment Woes
Every economist in the Reuters poll reported tariffs have dampened corporate confidence, with nearly half deeming the impact “very severe.” Capital planners and CFOs describe a pervasive chill across manufacturing and services sectors alike.
Lower morale shows in sentiment indexes, which have slid to multi‑year lows. Decision‑makers cite unpredictability—in costs, market access, and supply‑chain stability—as the main brake on expansion plans.
Households are scaling back on discretionary purchases amid rising living costs and unease about job security. Surveys point to sharply weaker intentions for big‑ticket items like cars and appliances.
Dwindling home‑equity gains and volatile equity portfolios compound the sting of higher gasoline and grocery bills. Many families are opting to save more, deferring vacations and renovations as a precaution.
Deepening U.S.-China Decoupling
Analysts warn that a sustained tariff war could truncate U.S.-China trade by as much as 80%, accelerating a split that began in the pandemic era. Supply‑chain realignments—from semiconductors to textiles—are already underway.
As businesses pivot toward alternative suppliers, new trade corridors are emerging in Southeast Asia and Latin America. Yet reshoring and diversification efforts remain costly and time‑consuming, delaying any full recovery in trade volumes.
In bond markets, the yield on the 10‑year Treasury has plunged nearly 60 basis points since January amid recession concerns. Equities, too, have lost ground, with major indices dipping as investors rotate into safer assets.
The rush for Treasuries has driven prices up, even as companies grapple with rising borrowing costs on commercial debt markets. This flight to quality highlights the deepening unease over near‑term growth.
Investment Banks Flag Rising Recession Odds
Goldman Sachs has raised its own recession probability forecast to 45% from 35%, joining a chorus of firms upping the ante on downturn risks. Such revisions come as trade disputes pile new burdens on corporate earnings.
These banks point to a widening gulf between financial conditions and real‑economy metrics. While equity valuations often reflect long‑term potential, sentiment gauges and forward‑looking indicators have soured markedly.
Surveyed executives report delaying capital expenditures as tariff ambiguity clouds ROI projections. Planned upgrades to factories, IT systems, and logistics networks are being deferred until the policy landscape clarifies.
This investment hiatus threatens to undermine productivity growth, with ripple effects on hiring and wage gains. Long‑term projects—such as electric‑vehicle production lines—are among the hardest hit.
As the Fed sits on its hands, the European Central Bank prepares further rate cuts to counter euro‑area growth weakness. This policy divergence is highlighting regional differences in how trade tensions impact economic activity.
The ECB’s more dovish pivot reflects a sharper downturn in European manufacturing, which is more exposed to Chinese markets. The resulting capital flows are reshaping cross‑border borrowing and exchange‑rate dynamics.
Currency Strength Undermines Exports
The dollar’s resilience amid U.S. policy steadiness has eroded export competitiveness, blunting gains for manufacturers and farmers. American goods grow more expensive abroad even as foreign producers seek new buyers in Europe and elsewhere.
This currency drag adds another layer of stress to exporters already reeling from higher input costs. Net export figures, once a growth pillar, may now contribute negatively to GDP.
Persistent duties on steel, aluminum, electronics, and consumer goods have kept global input prices elevated. Supply‑chain managers report passing much of these costs onto buyers, sustaining headline inflation above central bank targets.
Expectations for CPI and PCE measures to stay elevated through 2027 suggest that tariff‑induced shocks will linger long after politics shift. Firms face tough choices between margin erosion and further price hikes.
Volatility Fuels Safe‑Haven Moves
Heightened market swings have driven investors toward traditional havens like U.S. Treasuries and the dollar, challenging their role as reliable refuges. Even gold has rallied as traders seek to hedge against policy missteps.
This scramble into “safe” assets can exacerbate dislocations: stronger haven demand promotes dollar strength, which in turn undermines U.S. export prospects. The feedback loop underscores how policy uncertainty can amplify market turbulence.
With trade frictions set to persist and macro indicators signaling cooling activity, businesses and policymakers alike face a fraught balancing act. Keeping commerce flowing without sacrificing domestic stability may prove the defining challenge of the year.
(Source:www.reuters.com)
Only a month ago, forecasters saw recession odds of roughly one in four. The rapid shift underscores how quickly trade tensions can unsettle sentiment, transforming growth prospects in the world’s largest economy.
Brief Tariff Truce Fails to Soothe Markets
A 90‑day suspension of reciprocal levies offered little comfort as business sentiment remained deeply negative. Firms reported that the pause provided only fleeting relief, with uncertainty persisting amid new threats of tariff escalation.
Even with the temporary truce, surveys suggest companies are holding back on hiring and investment plans. The spectre of fresh duties—from steel to technology goods—continues to loom over boardroom decision‑making.
The median GDP forecast for 2025 has tumbled from 2.2% down to just 1.4%, reflecting sweeping downgrades across major Wall Street and Washington forecasters. Next year’s rebound is expected to be muted as well, with growth of only 1.5%.
This revision marks one of the steepest monthly adjustments since mid‑2022. Economists attribute the downward spiral to disrupted supply chains, higher import costs, and faltering global demand tied to tariff policies.
Inflation Fears Constrain Rate Cuts
Rising inflation expectations have clipped the Federal Reserve’s scope for easing. Most economists now believe no more than two quarter‑point rate reductions are feasible this year, as households and businesses brace for higher prices.
With core inflation measures staying stubbornly above target, policymakers face a delicate trade‑off: cutting too aggressively risks reigniting price pressures, while holding firm could deepen economic pain.
Federal Reserve officials have signalled an intention to maintain the federal funds rate between 4.25% and 4.50% at least through mid‑year. The central bank is waiting for clearer evidence on how tariff measures will reshape the outlook.
Speeches from regional presidents stress a cautious stance, reflecting concerns that further escalation could amplify both inflation and growth headwinds. The Fed’s “wait‑and‑see” posture contrasts with more activist leanings in earlier months.
Widespread Business Sentiment Woes
Every economist in the Reuters poll reported tariffs have dampened corporate confidence, with nearly half deeming the impact “very severe.” Capital planners and CFOs describe a pervasive chill across manufacturing and services sectors alike.
Lower morale shows in sentiment indexes, which have slid to multi‑year lows. Decision‑makers cite unpredictability—in costs, market access, and supply‑chain stability—as the main brake on expansion plans.
Households are scaling back on discretionary purchases amid rising living costs and unease about job security. Surveys point to sharply weaker intentions for big‑ticket items like cars and appliances.
Dwindling home‑equity gains and volatile equity portfolios compound the sting of higher gasoline and grocery bills. Many families are opting to save more, deferring vacations and renovations as a precaution.
Deepening U.S.-China Decoupling
Analysts warn that a sustained tariff war could truncate U.S.-China trade by as much as 80%, accelerating a split that began in the pandemic era. Supply‑chain realignments—from semiconductors to textiles—are already underway.
As businesses pivot toward alternative suppliers, new trade corridors are emerging in Southeast Asia and Latin America. Yet reshoring and diversification efforts remain costly and time‑consuming, delaying any full recovery in trade volumes.
In bond markets, the yield on the 10‑year Treasury has plunged nearly 60 basis points since January amid recession concerns. Equities, too, have lost ground, with major indices dipping as investors rotate into safer assets.
The rush for Treasuries has driven prices up, even as companies grapple with rising borrowing costs on commercial debt markets. This flight to quality highlights the deepening unease over near‑term growth.
Investment Banks Flag Rising Recession Odds
Goldman Sachs has raised its own recession probability forecast to 45% from 35%, joining a chorus of firms upping the ante on downturn risks. Such revisions come as trade disputes pile new burdens on corporate earnings.
These banks point to a widening gulf between financial conditions and real‑economy metrics. While equity valuations often reflect long‑term potential, sentiment gauges and forward‑looking indicators have soured markedly.
Surveyed executives report delaying capital expenditures as tariff ambiguity clouds ROI projections. Planned upgrades to factories, IT systems, and logistics networks are being deferred until the policy landscape clarifies.
This investment hiatus threatens to undermine productivity growth, with ripple effects on hiring and wage gains. Long‑term projects—such as electric‑vehicle production lines—are among the hardest hit.
As the Fed sits on its hands, the European Central Bank prepares further rate cuts to counter euro‑area growth weakness. This policy divergence is highlighting regional differences in how trade tensions impact economic activity.
The ECB’s more dovish pivot reflects a sharper downturn in European manufacturing, which is more exposed to Chinese markets. The resulting capital flows are reshaping cross‑border borrowing and exchange‑rate dynamics.
Currency Strength Undermines Exports
The dollar’s resilience amid U.S. policy steadiness has eroded export competitiveness, blunting gains for manufacturers and farmers. American goods grow more expensive abroad even as foreign producers seek new buyers in Europe and elsewhere.
This currency drag adds another layer of stress to exporters already reeling from higher input costs. Net export figures, once a growth pillar, may now contribute negatively to GDP.
Persistent duties on steel, aluminum, electronics, and consumer goods have kept global input prices elevated. Supply‑chain managers report passing much of these costs onto buyers, sustaining headline inflation above central bank targets.
Expectations for CPI and PCE measures to stay elevated through 2027 suggest that tariff‑induced shocks will linger long after politics shift. Firms face tough choices between margin erosion and further price hikes.
Volatility Fuels Safe‑Haven Moves
Heightened market swings have driven investors toward traditional havens like U.S. Treasuries and the dollar, challenging their role as reliable refuges. Even gold has rallied as traders seek to hedge against policy missteps.
This scramble into “safe” assets can exacerbate dislocations: stronger haven demand promotes dollar strength, which in turn undermines U.S. export prospects. The feedback loop underscores how policy uncertainty can amplify market turbulence.
With trade frictions set to persist and macro indicators signaling cooling activity, businesses and policymakers alike face a fraught balancing act. Keeping commerce flowing without sacrificing domestic stability may prove the defining challenge of the year.
(Source:www.reuters.com)
