What could trigger a U.S. economic recession in 2025?

Experts suggest that “sticky inflation”, increasing national debt, and the strict tariff policies introduced by the newly elected U.S. president could lead to a recession in the U.S. economy. A Kazinform News Agency correspondent investigated the likelihood of this scenario.

GDP growth rates

The Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce reported that the real Gross Domestic Product (GDP) increased by 2.8% in the third quarter of 2024 compared to the same period in 2023 but slowed down from the second quarter figure of 3%.

A positive factor is that investments in manufacturing continue to grow. Over the first nine months of this year, construction spending amounted to $1.62 billion, which is 7.3% higher than the $1.51 billion recorded for the same period in 2023.

Overall, real GDP is expected to increase by 2.7% in 2024 and by 1.5% in 2025. It is forecasted that real GDP growth will range from 1.7% to 2.1% annually between 2026 and 2028. This presents risks, as a recession typically involves two consecutive quarters of negative GDP growth, combined with other adverse economic indicators.

Unemployment rate below 5%

The unemployment rate stood at 4.1% in October, affecting 7 million people. However, this figure significantly exceeds the 2023 low of 3.4%. The highest unemployment rate was observed in July at 4.3%, while the historical peak occurred in April 2020 at 14.7%.

High unemployment is a major component of a recession, signaling economic slowdown as businesses lay off workers. However, an unemployment rate below 5% reflects a healthy economy, creating an optimistic outlook for the country.

Americans earn and spend more

GDP growth has been supported by increased earnings and spending among Americans. Consumer spending rose by 3.7% in the third quarter, the largest increase since early 2023, driven by higher incomes.

A decline in consumer spending affects business revenues and leads to layoffs, which together signal an approaching recession. However, such signs are currently absent in the U.S. economy. It is forecasted that business investments will grow by 4.2% this year, slightly below the 4.5% growth recorded in 2023.

Prices Increased by 2.5%

In October, the annual inflation rate in the country reached 2.6%, slightly higher than the 2.4% recorded in September. The Consumer Price Index (CPI) inflation is expected to decrease to 2.7% by the fourth quarter.

According to Statista, prices are projected to grow by 2.9% in 2024. Inflation is expected to decline to 2.1% by 2029.

Stock market growth

The two main stock market indices, “S&P 500” and “Dow Jones” are showing growth in 2024. As of November, the “S&P 500” index rose approximately 26% since the beginning of the year, partly due to the sharp increase in Nvidia and Microsoft shares, while the “Dow Jones” grew by nearly 7.5%.

According to LSEG, analysts expect “S&P 500” earnings to grow by 14.2% and “Dow Jones” earnings by 4.0% in 2025.

Although the stock market is not a perfect indicator of the U.S. economy, its growth reflects strong corporate profits.

Forecasts

Despite no clear indicators of an impending recession, forecasts on the U.S. economy vary. According to the Conference Board (a nonprofit comprising over 1,000 public and private corporations from 60 countries), the U.S. is not on the brink of a recession. GDP in 2024 is expected to remain positive, growing by 2% by the end of 2025, reflecting the Federal Reserve’s achievement of its 2% inflation target and lower interest rates.

In the “KPMG US CEO Outlook Pulse Survey 2024” 87% of 100 CEOs of major American companies expressed confidence in the country’s economic growth prospects, and only 4% expected workforce reductions. These results suggest that the labor market will remain relatively healthy, avoiding a recession.

According to Goldman Sachs Research, the probability of a U.S. recession in 2025 decreased from 20% to 15%, driven by signs of resilience in the labor market. The main reason for this revision is the drop in unemployment to 4.051% (lower than July’s 4.253%).

However, there are also pessimistic assessments for 2025. As of August, JP Morgan Research raised the probability of a global recession by the end of 2024 to 35%, up from 25% mid-year. The probability of a recession by the end of 2025 remains unchanged at 45%.

The Federal Reserve Bank of New York forecasts a 56% chance of a recession by July 2025, based on U.S. Treasury yield curve indicators (where the yield on 10-year Treasury bonds falls below the yield on 2-year bonds).

According to Statista’s research, there is a 61.79% probability of a U.S. recession by August 2025, reflecting a slight increase compared to the previous month’s forecast.

Factors that could slow a recession

This pessimistic scenario stems from several factors that could trigger a recession. For example, inflation remains a significant risk for economic stability in 2025. While the Federal Reserve made progress in fighting inflation in 2024, recent Personal Consumption Expenditures (PCE) index data indicate it is premature to declare victory. Core PCE, which excludes volatile food and energy prices and is the Fed’s preferred inflation measure, rose by 2.7% year-on-year in September, exceeding the Federal Open Market Committee’s (FOMC) 2% target.

“Sticky inflation” (prices that respond weakly to monetary policy adjustments, such as children’s clothing, auto insurance, and medical products) presents a unique challenge. Even if inflation in other sectors declines, sticky inflation could prevent the Fed from achieving its target, slowing interest rate cuts.

Another economic risk in 2025 is tariffs. Newly elected President Donald Trump has promised aggressive tariffs on goods imported from China and other U.S. trade partners, making tariffs a central part of his economic plan. Supporters argue that such tariffs will help American businesses compete and encourage domestic hiring.

However, critics of the tariff strategy argue that tariffs will force American companies to pay higher prices for imported goods and components, and many of these companies will simply pass these higher costs onto consumers by raising prices. A widespread increase in prices could present a negative scenario for the economy, which is already dealing with elevated inflation.

Another factor is the U.S. national debt, which is growing rapidly and shows no signs of slowing down. It reached $36.1 trillion as of early December and serves as an additional destabilizing factor that could negatively impact the stability of the U.S. economy.

According to experts, servicing the growing national debt could adversely affect critical public investments that drive U.S. economic growth in areas such as education, research and development, and infrastructure.

Earlier, Kazinform News Agency reported on the U.S. national debt, the countries that purchase U.S. government bonds, and the risks it poses to the global economy.