Economists maintain recession alert in spite of Trump pivot

Wall Street economists maintained their forecasts for a sharp slowdown in US economic growth and warned recession risk is still elevated despite the Trump administration’s decision this week to delay major tariffs on a wide range of trading partners.

Morgan Stanley, BNP Paribas and RBC Capital Markets issued projections Thursday for gross domestic product ranging from 0.1% to 0.6% growth in 2025, and 0.5% to 1.5% growth in 2026. They forecast the unemployment rate would climb to almost 5% next year and penciled in higher inflation in the coming quarters.

The lingering pessimism among economists contrasts somewhat with the signal from the stock market, which has rallied since President Donald Trump announced Wednesday that he was implementing a 90-day pause on previously announced “reciprocal” tariffs for countries other than China and raising the duty on Chinese imports to a whopping 145%.

After the back-and-forth on Wednesday, the average US tariff rate remains roughly the same, hovering at the highest in over a century, and is nearly 24 percentage points higher than when Trump took office, according to Bloomberg Economics. 

“Will anything close to these tariffs and this uncertainty persist for long? If yes, then we would be forecasting a US recession,” BMO Financial Group Chief Economist Douglas Porter wrote Friday in a note. “At this point, we are still leaning to a series of quarters of sub-1% GDP growth.”

For economists, a higher tariff on Chinese goods roughly offsets the suspension of planned duties on other countries in terms of its impact on the weighted average levy on all US imports, given China’s outsize importance as one of America’s biggest trading partners.

Bloomberg Economics estimates the effective average tariff on US imports was reduced only marginally to 26.25% as a result of Wednesday’s announcement, from 26.85%.

What Bloomberg Economics Says...

“President Donald Trump’s tariff U-turn this week may not actually lessen the blow to the US nor worsen it for China. It has only a small positive impact on Europe’s economy. The benefits will be felt most in the small open economies of Asia — if it’s maintained beyond the 90 day pause.”

— Maeva Cousin and Eleonora Mavroeidi, economists

That leaves recession risk uncomfortably high for 2025. Goldman Sachs economists peg it at 45%, versus 65% before Trump announced the pause. In a note Wednesday following the announcement, JPMorgan Chase & Co. Chief US Economist Michael Feroli said the bank would be revisiting its forecasts, indicating “the prospect of a recession is a closer call” though “a contraction in real activity later this year is more likely than not.”

On Friday, Federal Reserve Bank of New York President John Williams said he now expects “real GDP growth will slow considerably from last year’s pace, likely to somewhat below 1%.”

The unemployment rate is set to climb to somewhere between 4.5% and 5% over the next year — from 4.2% in March — and inflation will rise to 3.5% or 4%, versus February’s 2.5% rate, Williams said. Those numbers suggest his projections are in line with the latest consensus estimates among Wall Street forecasters.

Financial markets have remained volatile since Trump’s Wednesday announcement. As of 2:03 p.m. Friday in New York, the S&P 500 was up 7.5% from Tuesday’s closing low, though it remained 12.8% below the record high reached in February.