2025 Recession? Here’s what the experts think

The Economic Word of the Week. Trump Session. It's just policy uncertainty. Markets don't like it. There is going to be a period where it's going to be panic at the disco. Yes, tariffs at that kind of level, that would not be good for US economic performance. Fears of an economic slowdown induced by the President's trade policies have escalated this week, after an interview with Fox where he said this. Are you expecting a recession this year? I hate to predict things like that. There is a period of transition. The implication being that Trump likely intends on pushing forward with raising import tariffs, even if it means creating some economic pain in the short term. And boy did financial markets react. The S&P 500 dropped nearly 2% at market open and down nearly 3% on the day. The Nasdaq composite of US tech companies took a 4% hit, and it was a bloodbath for some individual stocks. Tesla down nearly 16% on the day, now trades 54% below its all-time high. Nvidia saw a couple hundred billion dollars of value wiped out, and sits 30% below its peak valuation. Not everything was in the red, but it was a pretty brutal day for stocks. The comments from Trump were accompanied by the release of new economic data and experts weighing in with their forecasts. The Federal Reserve Chairman Jerome Powell, JPMorgan, and Warren Buffett, just to name a few. So let's see what they had to say, starting with the investment bank Goldman Sachs. To start the week, chief economist Jan Hatzewitz released a research note in which Goldman provided a downgraded forecast for the economy in 2025. This comes just a few months after they provided a very positive outlook. We see several strong tailwinds pointing to solid US growth in 2025. Our baseline forecast is 2.5% growth, well above consensus. They viewed inflation to be on a continued path towards the 2% target over the following years, and that Federal Reserve rate cuts in 2025 would be a tailwind for business growth and investment. But there was one risk that they noted could derail their prediction. The biggest risk to our outlook is just how much of a tariff increase the Trump administration will impose. But in our risk case of a 10% across the board tariff, we'll actually get a re-acceleration in inflation to 3% plus, at least for a period of time. What was only considered a less likely risk case in December now appears to be playing out. Hatzewitz in his press release said, We now see the average US tariff rate rising by 10 percentage points this year, twice our previous forecast and about five times the increase seen during the first Trump administration. A large part of this comes back to Trump's plan to install reciprocal tariffs and how broadly they will be applied. The European Union, for example, has a value added tax or VAT of about 20%. That tax applies on all goods and services sold domestically within European countries, but it also applies to companies importing goods, say from the United States. So in that respect, the VAT kind of acts like a tariff on US imports into the EU, except there is a major difference. If the business imports goods from the US and then sells them in the EU, they can usually deduct the tax when making their VAT declaration. I'm not a tax accountant and I'm certainly not a European Union tax accountant, so I'm not going to go into the fine print on this. But essentially the Trump administration views the EU's value added tax as equivalent to a tariff, at least according to Hatzewitz, meaning Trump may place a 10% or more tariff on EU imports as a retaliation. And the more near-term impact is that if you put, you know, if you increase tariffs, there is going to be some impact on prices. The PCE price level, by our estimates, rises by about 10 basis points for each one percentage point in the average tariff rate. Which in simple terms means possibly 3 to 4% inflation rather than their original 2.5% forecast. It's also caused Goldman to lower their projection for economic growth in 2025 from a 2.4% increase in real gross domestic product to just 1.7%. And specifically regarding the chance of a recession where GDP actually contracts for multiple quarters in a row, they raised their probability to 20%. This sentiment was echoed by another big investment firm, JP Morgan, although their view is much more negative. They also released their original 2025 outlook at the end of last year. Their projection for global GDP growth was 2.5%, with core CPI inflation remaining about its then level of 3%. Again, just like Goldman, JP Morgan didn't believe that Trump's economic policies would be as aggressive as they've been. Stating, our baseline view anticipates a version of the Trump presidency that is tamer than what he campaigned on. A key risk to the outlook is if policy shifts are more extreme. So again, over the weekend, as it became clearer that Trump is adamant on large widespread tariffs, JP Morgan's outlook has become more bleak. Back in December, they predicted a 15% chance of a global recession by mid-year, and a 30% chance by the end of 2025. That risk has been up to a 40% probability of recession by year-end. With team leader Bruce Kasman stating, we see a material risk that the US falls into recession this year, owing to extreme US policies. And we also got an update from Morgan Stanley along similar lines, a decrease in outlook for GDP growth to just 1.5%, and an increase in their inflation expectations to 2.5%. But as gloomy as all the headlines look this week, downgrade this, worsening conditions that, the economy is actually in pretty good shape. Over the weekend, we also heard directly from Jerome Powell, the chairman of the Federal Reserve. He gave a speech at the University of Chicago Booth School of Business, providing a much more balanced outlook. Despite elevated levels of uncertainty, the US economy continues to be in a good place. The US central bank's goals are to maintain full employment, and to keep prices as stable as possible. And on those fronts, the latest data is pretty positive. Many indicators show that the labor market is solid and broadly in balance. The jobs report released this morning showed employers added 151,000 jobs to payrolls in February, and the unemployment rate ticked up one tenth to 4.1% last month. The unemployment rate remains low, and has held in a narrow range between 3.9% and 4.2% over the past year. Wages are growing faster than inflation, and at a more sustainable pace than earlier in the pandemic recovery. The labor market is not a significant source of inflationary pressure. Since the COVID spike, the Fed has been able to keep the unemployment rate extremely low, which is great for workers. You want an economy to have high demand for workers, and strong participation. Businesses needing to compete for labor are forced to raise wages, which have been rising faster than inflation. But it can also get too hot, which is why it needs to be monitored. Inflation has come down a long way from its mid-2022 peak. Data released last week show that total PCE prices rose 2.5% over the 12 months ending in January, and that core PCE rose 2.6%. Low inflation and a thriving jobs market has been fueling decent economic growth. Turning to the recent data, the economy has been growing at a solid pace. But the key phrase from Powell about the current environment is heightened uncertainty. The Trump administration has kicked off a number of changes. Changes to trade, but also to immigration, government spending, and business regulations. And regardless of whether you agree with these changes or not, it certainly brings a fresh batch of uncertainty. Powell is essentially saying that we might see some inconsistent economic data over the coming months, but that doesn't necessarily mean it'll persist for long enough to cause a serious downturn. And maybe the most important part of the speech was around the economic factors that people always forget when recession fears are stoked. Technological development has been an enormous factor in keeping the US economy moving forward. And it too is a huge question mark. Just taking artificial intelligence for example, nobody has a clue how impactful it'll be to productivity. So putting a number on economic growth or a date on when a slowdown is coming is just something that's impossible. And the man who's repeated that philosophy for decades also recently had something to say about all of these economic concerns. He also happens to be one of the greatest investors of all time. Warren Buffett did an interview with CBS last week, and while its focus wasn't investing, his company, or even the economy, he did end up answering some questions about it. Well, to be more accurate, the host tried to get him to answer questions on it. Buffett did share his views on tariffs during the interview, but he generally steers away from talking economics. Precisely because it's kind of like trying to predict whether it'll be raining in 78 days and 4 hours. What the economy is going to do in the next year doesn't even matter to Buffett, because he's only buying businesses that will thrive regardless. But he did have something rather amusing to say about tariffs. Economics is like the physics of money. You can never just do one thing. There's always a reaction, and a reaction to the reaction. The COVID situation is the most blatant example. Governments needed to borrow lots of money, and spend big to protect people and businesses. And central banks needed to lower interest rates to encourage spending and investment. But the consequences of being so aggressive with policies is the inflationary period we've seen since then. But all of this talk of higher tariffs, inflation returning, and slower economic growth is still only about half the picture. There's another important reason why stocks absolutely tanked on Monday. Valuations. When you buy a stock, you're basically buying a claim of ownership on what the business currently has, and what they might produce in the future. The higher the price you pay for the stock compared to its current profits, naturally, the more its profits need to grow in the future for you to make a good return. For the whole stock market, you compare the price of the S&P 500 index to the profits of those companies. And today, the market is relatively much more expensive than across most of history. And even more interesting, you can actually look at how stocks have performed based on how expensive the market was at the beginning of the period. JP Morgan did this over 27 years, and it shows that when markets have been this expensive, the next 10 years of stock returns have always been between plus two and minus two percent per year. Quite the change from the 20 plus percent per year returns we've had in three out of the last five years. But it's also important to remember that even this doesn't prove that the market is expensive relative to past periods. But it's also entirely possible that companies grow earnings faster than past periods, and that prices are justified. We'll really only know if today's market was expensive in hindsight when we look back and see how profits grew and whether they met our rosy optimistic expectations. But I think going through this stuff does help to keep your expectations in check, because 20 plus percent yearly returns is not normal. 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