How Worried Should you Be About a Recession?

Key Takeaways

• Recession fears reignited this week as a stock market sell-off put the S&P 500 into a correction.
• Many economists and analysts believe that a full-blown recession is unlikely. They predict a moderate recession.
• Forecasters will be watching tariffs, consumer spending and other factors that could indicate a slower than expected growth.

The recent stock market sell-off has brought back the recession talk, but it doesn’t mean that one is imminent.

A full-blown depression is certainly possible, and it seems more likely to happen after this past week. This will be the case if cautious U.S. consumers’ spending plummets causing employers lay off workers. According to economists and analysts, a weaker growth is more likely at the moment. Rather than firing on all cylinders, the U.S. economy may rise at a lackluster pace instead—which isn’t great news but is far from a panic signal.

Wells Fargo economists wrote that “we believe the economy won’t slip into recession” in a recent research note. They cited as a buffer “solid fundamentals”, including healthy household balance sheets.

However, they did note that the economy “lost steam in early 2020” which, coupled with tariff uncertainty and federal job cuts, may have a negative impact. 

How should you view the recent stock market decline?

Stocks have not recovered from Monday’s plunge. Investors’ dump of technology shares has put the Nasdaq Composite Index – which is heavily geared towards technology – more than 13 percent below its recent peak. The S&P 500 index officially fell into a correction Thursday, where an index falls 10% from its peak.

Joe Brusuelas is chief economist at RSM US LLP. He says that a steep drop in the stock market is a “classic formula for a slower pace of household consumption by the wealthy.” When stock markets increase, the so-called “wealth effect” makes upper-income families feel wealthier, and they spend more. This boosts the economy. 

Brusuelas stated that lower stock prices have an opposite effect and wealthy households will likely reduce their spending in the current quarter. The U.S. can tolerate some slowing, but not a prolonged contraction.

“The current fear of growth is overstated,” Brusuelas explained. “My feeling is that we are just experiencing a late-cycle business slump.”

He expects that the economy will grow at a rate of 1.5% in this quarter. This is a slowdown from the 2.5% or higher growth rates of the past few years. He said this was not unusual. Growth had actually dipped to negative territory at the beginning 2022 and then continued to climb.

Tariffs may increase the chance of a recession

The economy will also be at risk over the next few months as President Donald Trump decides whether or not to proceed with tariffs against Canada and Mexico, plus impose new tariffs on goods across the globe.

“If there are additional tariffs, then we might need to take a backward step and reassess forecasts for growth and consumption,” Brusuelas stated, adding that waiting is “the hardest part.”

Scott Bessent said on CNBC that he was “not concerned” about a small amount of volatility in the next three weeks. He said that the administration is focused on improving “the real economic situation” over the long term.

Satyam Panday, chief U.S. and Canada economist at S&P Global Ratings, sees a 25% chance of a U.S. recession in the next year as uncertainty takes a bite. 

“There's an increasing risk that supply-side shocks from tariffs, decelerating immigration growth trends, and curbs on the federal government workforce will create a lasting negative feedback loop,” Panday wrote in a research note. 

The latest jobs report shows that U.S. employers created 151,000 jobs in the month of February. The unemployment rate also remained low at 4.1%. Analysts and investors are increasingly looking at the future and ignoring data that they deem outdated.

Slower spending could be the real concern, though

Recent surveys show that consumers are feeling less confident. American Eagle Outfitters, Delta Air Lines and other companies have all reported a drop in spending. 

After Trump’s victory, CEOs seemed to be remarkably optimistic, raising hopes of an investment boom for corporations. However, this optimism seems to have also waned. Business Roundtable reported that its CEO Economic Outlook Index has returned to the levels of last year after rising to 90 following Trump’s win in November.

Chuck Robbins is the CEO of Cisco, and the chair of the Business Roundtable. He said that the survey results showed that members were cautious about the future six months but saw opportunities to improve their growth.

Separately, a separate survey of economists by the American Bankers Association cited increasing downside risks. However, it forecasted a GDP growth of 2,1% in 2025-2026. The group believes there is a 30% probability of a recession in this year and next.

“The consensus forecast for positive economic growth and low recession risk is based on the expectation that new tariffs won’t stay in place for all of 2025,” said Luke Tilley, chief economist at Buffalo, New York-based M&T Bank and chair of the ABA’s advisory panel of economists. “The longer the tariffs are in place, then the greater the chance of a recession.”