The U.S. economy is navigating treacherous waters in 2025, battered by a wave of new tariffs and the financial turbulence they have unleashed. The April tariff shock, which imposed sweeping duties on key imports, has rattled consumer confidence, shaken markets, and clouded the growth outlook. Yet, despite rising fears, there remains a path forward that could see the economy avoid slipping into a recession.
Recent consumer sentiment data paints a grim picture. The first surveys conducted after the tariff hikes show expectations plunging to levels not seen since the early 1980s — comparable to the psychological tolls during the COVID-19 pandemic, the Great Recession, and the downturn of the early 1990s. Such a sharp erosion of confidence is a warning shot for policymakers.
Financial markets have reacted violently. Stock indexes have entered correction territory, the U.S. dollar is losing ground, and the yield curve has inverted sharply, with the spread between 10-year and 2-year Treasury yields reaching its widest gap since early 2022. The bond market signals growing concerns not just about slower growth, but about rising political risk, as foreign investors appear increasingly wary of U.S. assets.
A Narrow Path to Stability
Despite the daunting challenges, economists at Comerica forecast that a full-blown recession is still avoidable. Their April projections assume that the U.S. government will soon enter negotiations with major trading partners, resulting in at least a partial rollback of the most damaging tariffs. Such a move could stabilize markets and ease some of the pressure on growth.
Nonetheless, a slowdown appears unavoidable in the near term. Comerica expects the U.S. economy to experience a significant “growth scare” through the second and third quarters of 2025. In response, the Federal Reserve is projected to pivot toward a more accommodative stance, cutting the federal funds rate by 25 basis points at each of its meetings in July, September, and December. Additional easing, totaling half a percentage point, is anticipated in 2026.
On the fiscal side, expansionary policies are expected to help cushion the blow. The government is forecast to use tariff revenues, along with savings from newly implemented spending reductions, to fund an extension of the 2017 tax cuts. Additional tax incentives and market-friendly policies promised during the 2024 presidential election are also expected to be rolled out to boost investor and consumer confidence.
If this policy path holds, Comerica believes the U.S. economy will “muddle through” 2025 and 2026, sidestepping a technical recession but enduring a period of sluggish growth.
Labor Market and Inflation Outlook
The labor market is expected to soften but remain relatively stable. The unemployment rate, currently at 4.1%, is projected to rise gradually to an average of 4.5% in 2026. Job creation is forecast to slow, exacerbated by tightening immigration policies. Notably, over 1.5 million visas were cancelled in March and April, curbing labor force growth at a critical time.
Meanwhile, inflation pressures are expected to build but remain below the peak levels seen in 2022. Rising tariffs will likely pass through to consumer prices, but a weakening economy should temper the overall inflationary surge.
Still, the balance of risks is skewed to the downside for growth and to the upside for inflation and interest rates. The Federal Reserve, while open to easing, has made clear that with inflation rising, it will not be as quick to cut rates as during past economic slowdowns. If inflation accelerates more sharply than expected, the Fed could even be forced to consider additional hikes — a move that would further tighten financial conditions and heighten recession risks.
Threats on the Horizon
Several factors could derail the relatively optimistic outlook:
- Escalating Trade Tensions: If trade negotiations falter and new rounds of tariffs are implemented, the resulting uncertainty could paralyze investment and consumer spending.
- Loss of Investor Confidence: A deeper erosion of trust in U.S. fiscal and monetary policy could spark capital flight, a falling dollar, and tighter financial conditions.
- Sticky Inflation: Persistent inflationary pressures could corner the Federal Reserve into maintaining a restrictive policy stance longer than currently anticipated.
Each of these scenarios would significantly increase the likelihood of a recession in late 2025 or early 2026.
Possible Upside Surprises
Yet, it would be premature to rule out more favorable outcomes. Some plausible scenarios could breathe new life into the economy:
- Rapid Trade Deals: A successful negotiation breakthrough that rolls back key tariffs could restore business confidence and stabilize markets.
- Aggressive Fed Action: Should the Fed pivot quickly with a strong series of rate cuts, financial conditions could ease sufficiently to support renewed growth.
- Pro-Business Policy Pivot: A shift toward more market-friendly tax and regulatory policies could stimulate private sector investment, hiring, and consumer spending.
Under these conditions, the U.S. economy could rebound faster than expected, pushing aside recession fears and reigniting expansion.
A Critical Moment for Policymakers
Ultimately, the next six months will be pivotal. How the administration manages trade negotiations, how quickly the Federal Reserve adapts its policy stance, and how effectively fiscal measures are deployed will determine whether the economy can skirt recession and maintain moderate growth.
Markets will be watching closely for signs of progress. Any announcement indicating de-escalation of the trade war or a strong commitment to stimulus measures could spark a rally in risk assets and a rebound in consumer and business confidence.
Conversely, missteps or prolonged uncertainty could tip an already fragile economy into contraction.
Conclusion: Uncertain, but Navigable
The U.S. economy is navigating through a rare and dangerous crossroads. Tariffs and trade tensions have introduced a level of uncertainty not seen in years, rattling consumers, businesses, and investors alike.
However, recession is not a foregone conclusion. With the right mix of monetary easing, fiscal stimulus, and diplomatic breakthroughs, there remains a viable path for the economy to muddle through the turbulence of 2025 and emerge more stable in 2026.
The stakes are high, and policymakers have little room for error.
