Are We Headed for a Recession?

President Donald Trump proposed tariffs on all U.S. trading partners in April. Since then, recession predictions have increased. How likely is the U.S. to go into a recession? Answers to these questions require a closer look at economic data. ­­­

What does a recession mean?

The economy is cyclical and experiences periods of growth (expansion) and decline (contraction). Typically, the macroeconomic term “recession” refers to a significant decline — usually two consecutive quarters — in a designated region’s general economic activity.

Economists historically considered gross domestic product (GDP) in conjunction with monthly indicators, such as a rise in unemployment, to determine cycles. The National Bureau of Economic Research (NBER) is the agency that makes an official recession declaration and it’s redefined the criteria. The NBER now defines a recession as:

• Substantial decline in financial activity spanning multiple economic areas and lasting more than a few months.


• Criteria that are visible in real GDP, real income, nonfarm payroll employment, industrial production and wholesale-retail sales.1

The NBER now emphasizes nonfarm payroll employment and real personal income, less transfers, as its primary indicators but takes a more holistic economic approach in declaring recessions.2

What causes a recession?

There are many factors that can cause a recession. These include changes in supply and demand, political unrest, fading consumer and business confidence in the economy, and inflation. Like the NBER, economists keep close watch on key indicators like employment, income and interest rates.

• The inflation rate skyrocketed over the last three years, reaching a peak of 9.06% in June 2022.3 This number was well above the “normal” rate of 1% to 2% annually, which signaled the economy was overheating.


• High unemployment rates generally indicate a floundering economy. For example, during the pandemic the unemployment rate was 13%.4 Income levels also dipped significantly and both impacted consumer spending.


• When there is low economic growth, the Federal Reserve (Fed) lowers interest rates to encourage hiring and consumer borrowing.

These are just some of the factors that, for economists, pointed to a potential recession in recent years.

How does raising interest rates help inflation?

The Fed has a mandate to pursue maximum employment and price stability — dual economic goals. What is the relationship between the Fed and inflation? Employment and pricing are key contributors to inflation, which is why the agency’s goal is to strike the right balance between the two. However, the agency has limited tools to address inflation. Essentially, they can only restructure monetary policy, raising or lowering interest rates and making treasuries’ asset purchases.

Theoretically, interest rates and inflation trend in the same direction. So, when interest rates are low, consumers and businesses spend and borrow more. Conversely, consumers and businesses are less likely to borrow when interest rates are high, which lowers demand for goods and services. This slows the economy.

The Israel-Hamas conflict, Ukraine’s ongoing war, an injection of almost $7 trillion into the U.S. economy since 2021, as well as attempting to eliminate fossil fuels without a viable alternative increased inflation to record 42-year high levels.

To curb inflation, the Fed raised the benchmark interest rate 11 times since March 2022. The agency has since lowered the rate three times. The range is 4.25% - 4.50%, while inflation is currently 2.39%. The lower inflation rate is favorable but is still above the targeted 2% the Fed would like to see.

In January and April, Trump directed the Fed to lower the benchmark interest rate. However, Fed Chair Jerome Powell is concerned about the “larger-than-expected-tariffs” and their impact on inflation and economic growth.5 Rather than immediately lower rates, Powell instead opted to continue monitoring the economy to determine if further cuts will be necessary.

Do leading financial institutions expect a recession?

The economy plays a key role in borrowing and lending, so financial institutions also carefully assess trends and indicators to understand how it will impact business. Recent reactions include:

• The Atlanta Federal Reserve’s GDPNowTM tracker forecasted annualized -2.2% GDP growth in the first quarter of 2025. The alternative model, adjusted for gold imports and exports, was -0.1% 6


• The Blue Chip Economic Indicators December 2024 survey predicted a 2.1% rate or 1.9% at worst.7


• The World Bank expects global economic growth to hold steady at 2.7% through 2026.8

These figures indicate an economic slowdown but not necessarily an imminent recession.

What have past recessions looked like?

Studying past recessions can provide valuable insights into their makeup and causes. The recession during the COVID-19 outbreak lasted only two months. But the GDP fell to an unprecedented -28%9 and unemployment rose to 14.8%.10 How have past recessions compared?

• The 2007 Great Recession lasted 18 months, with peak unemployment at 10% and GDP -5.0%. The subprime real estate crisis was the primary contributor.
  
  
• The recessions most like the current economy — four of them during a 13-year period from 1969 to 1982 — lasted more than four years each. U.S. expenditures on Vietnam, shifting manufacturing abroad, high oil prices, and inflation drove the economic turmoil.

The unemployment rate is currently 4.2%. Prices are escalating and the Consumer Price Index stood at 319.62 in March. Over the past year, most average wage increases (3.4%) outpaced the inflation rate.11 However, tariffs could further disrupt the U.S. economy and drive inflation higher.

Are we headed for a recession in 2025? Given the tariff directives, Morningstar believes the risk is 40%-50% over the next year.12 Many economists agree, though – at 65% – their median probability is much higher.13

Do you have a plan for managing through a fluctuating economy? We can help. Complete a short form and a Synovus Treasury & Payment Solutions Consultant will contact you with more details. You can also stop by one of our local branches.

David Grimaldi is a Synovus Foreign Exchange Consultant. Grimaldi’s expertise includes FOREX trading solutions, hedging strategies, risk management and derivatives.