Is recession looming for US?

IN its meeting last week, the Federal Open Market Committee (FOMC) left key benchmark interest rates unchanged, but the revised economic growth outlook, inflation forecast and Federal Reserve (Fed) dot plot should make investors rethink their investment strategy.

As it stands, the question of whether the United States is headed for recession is gaining traction. More importantly, given President Donald Trump’s tariff agenda, inflation expectations remain elevated and could head further north.

Slower growth

The Fed has lowered its economic growth forecast for 2025 to 1.7% from 2.1% and expects modest growth of 1.8% for the next two years, down from previous estimates of 2.0% and 1.9%.

There is another key element to the Fed’s forecast for 2025, despite the relatively unchanged unemployment rate. The headline and core Personal Consumption Expenditure (PCE) rates have been revised to 2.7% and 2.8% for this year, up from 2.5% each. For 2026, the Fed expects the headline PCE to be 2.2%, up from 2.1%, while the core PCE remains at 2.2%.

Despite these revisions, the median Federal Fund Rate (FFR) remains unchanged at 3.9% for 2025 and 3.4% for 2026. However, the central tendency of the FFR for this year has been adjusted from 3.6% to 4.1% to 3.9% to 4.4%. For 2026, the Fed now expects the FFR to range between 3.1% to 3.9%, up from the previous estimate of 3.1% to 3.6%.

The slower economic growth projected by the Fed aligns with recent downgrades in growth forecasts by others.

The Organisation for Economic Cooperation and Development (OECD) lowered its global growth forecast by 0.2 percentage points to 3.1%. The OECD also reduced its US growth forecast to 2.2% from 2.4% in December last year.

Fitch Ratings has also lowered its US gross domestic product forecast to 1.7% from 2.1%. Fitch states that “fears of a recession in the United States have grown sharply in the last month”.

The US effective tariff rate (ETR) has already increased to 8.5% from 2.3% in 2024 and is expected to rise further. Fitch predicts a 15% ETR on Europe, Canada, Mexico and others in 2025, and 35% on China. This will raise the US ETR to 18% this year, the highest rate in 90 years.

Liberation Day?

The all-important reciprocal levies or tariffs will kick-off on April 2, or Liberation Day as Trump calls it, as he ramps up his trade war against the rest of the world.

According to the United States, the deep black hole in the form of national debt is mainly the fault of others, and it is time to fix it. It says a tariff wall is necessary in order to remove tariff barriers, non-tariff barriers, unfair funding, human rights issues, and currency manipulation imposed by other nations on US exports.

The 25% tariff announced on Canada and Mexico may also come into effect on the same day, unless there is some wheeling-dealing at the last minute or Trump views that he has to honour the US-Mexico-Canada Agreement, which promises free trade between the three North American countries.

A “25% tariff or higher” will also apply to semiconductors and pharmaceutical imports, following a 25% tariff on all automobile and automotive part imports announced just days ago.

Early this week, Trump imposed a 25% tariff on goods from countries importing Venezuelan oil, targeting China, which handles 40% to 50% of these exports. This may add further tariffs on Chinese exports to the United States, which are now subjected to 20% tariffs.

Consequently, China may seek alternative oil sources. The situation remains uncertain as we approach April 2.

A lose-lose game

Tariffs, levies, or any form of trade barriers, met with a retaliatory move by other nations will only result in greater pain for everyone and is contrary to opinions that the United States will benefit.

The potential tariffs will not see the dollar hitting new highs. The greenback, as measured by the Dollar Index, is down 3.9% year-to-date and 2.3% the past month, which is a testament that the market does not believe Trump’s tariffs will boost dollar value.

Instead, tariffs will cause prices to rise, inflation to remain elevated and give the Fed less room to lower rates anytime soon. As a result of Trump’s actions, the rest of the world will suffer pain and agony. It’s a lose-lose game, and the financial markets have already reacted accordingly.

Trump’s demand for the Fed to cut interest rates is problematic because it interferes with the Fed’s role in setting interest rates.

His unconventional approach to US debt, tax and tariffs could have long-term effects, similar to his decision to abandon environmental, social and governance issues.

From stagflation

to recession?

Economists define stagflation as a period whereby an economy is up against a high inflation rate as well as high unemployment with low growth. While inflation can still be said to be modest when measured against historical standards and unemployment has not crossed critical threshold levels, the slower growth in the US economy and Trump tariffs post-Liberation Day could see the United States going into a mild stagflation.

The US economy is driven by consumption and indicators suggest it may face stagflation or even a recession. US consumer confidence is at a four-year low, and expectations for the next six months are the lowest in 12 years. Inflation expectations are at a two-year high, with consumers expecting prices to rise 3.9% over the next five to 10 years, the highest in three decades.

In recent weeks, there has been more talk about whether the United States will enter a recession. This is usually defined as two consecutive quarters of negative economic growth.

However, the National Bureau of Economic Research (NBER) has a broader definition of recession for the United States.

It considers other economic data, such as industrial production, joblessness and real income, and typically announces the timing of a recession. In the NBER’s view, a recession lasts more than a few months and is not just about economic contraction.

The inverted yield curve, which compares 10-year and two-year US treasuries, has previously predicted recessions.

However, despite flashing a recession signal between July 2022 and August last year, the United States did not enter a recession. Currently, the yield curve shows no recession signs, with high inflation expectations and the Fed expected to cut rates no more than twice this year.

The US’ economic direction, influenced by tariffs on trading partners, may lead to a slower economy, mild stagflation, or a recession that could cause global economic contraction.