U.S. Economic Outlook: Trade Uncertainty and Consumer Strain Elevate Recession Risk

Published April 17, 2025 – Paul Beland.CFA By Paul Beland, Global Head of Research – Wealth Management

As 2025 unfolds, recession risk has evolved from a distant possibility into a tangible near-term concern. According to CFRA’s latest macro research, several compounding forces are driving the U.S. economy toward a potential downturn: prolonged trade policy uncertainty, softening consumer sentiment, and elevated inflation risks due to new tariffs. While certain areas of the economy—like the labor market—remain resilient, the broader macroeconomic environment is flashing caution signals.

In this blog, we’ll break down the key highlights from CFRA’s gated macro research report and explore what these developments mean for institutional investors, asset managers, and macro-focused allocators.

Trade Policy: The Biggest Risk Factor for 2025

At the heart of rising recession concerns is the unpredictable trajectory of U.S. trade policy. The imposition of broad-based tariffs, particularly those aimed at China and other major trade partners, has not only strained global supply chains but also fueled inflationary pressures that threaten domestic economic stability.

CFRA estimates that current and proposed tariffs could raise U.S. core inflation by 2 percentage points, pushing it to the 4%-5% range by the end of 2025. This would significantly exceed the Federal Reserve’s 2% inflation target, limiting the Fed’s ability to ease interest rates in the event of a growth slowdown.

“The inflationary impact of tariffs could restrict the Fed’s maneuvering room just when the economy needs stimulus the most,” notes Paul Beland, CFA, CFRA’s Global Head of Research.

Although there is still hope for de-escalation—CFRA’s Washington Analysis policy team sees potential for reduced tensions—the market is operating under heightened uncertainty.

Consumer Sentiment Weakens: A Red Flag for GDP

Consumer spending accounts for nearly 70% of U.S. GDP, making it a cornerstone of economic health. But recent data shows troubling declines in consumer confidence indicators:

The Consumer Confidence Index dropped to 92.9, its lowest level in 12 years.

The Consumer Sentiment Index plunged to 50.8, driven by pessimism about personal finances and job security.

These metrics often serve as leading indicators for economic activity. As sentiment weakens, so too does the likelihood that consumers will continue to spend at current levels.

CFRA expects consumer spending growth to slow to less than 1% in 2025.

Households are increasingly focused on saving rather than spending, especially those in lower-income brackets who are more vulnerable to price hikes driven by tariffs.

Labor Market: Still Resilient, But Vulnerable

Amid the gloom, one bright spot remains: the U.S. job market. Initial jobless claims remain below 300,000—an indicator of a stable labor environment—and nonfarm payrolls continue to grow, with a strong 228,000 jobs added in March 2025.

Wage growth has moderated but remains above pre-pandemic levels, helping to support household income and spending. That said, employment is a lagging indicator, and the full impact of protectionist policies may not be felt in hiring decisions until late 2025 or beyond.

If businesses begin pulling back on investments and hiring due to input cost inflation and trade uncertainties, labor market strength could weaken quickly.

Corporate Earnings: Downward Revisions Signal Trouble

While Q4 2024 corporate earnings growth surprised to the upside with a 16.2% year-over-year increase for the S&P 500, this performance pulled forward gains from 2025. As trade tensions persist, companies are issuing more cautious guidance—or pulling it entirely.

CFRA expects:

2025 earnings growth for the S&P 500 to come in closer to 6%-7%, down from the current consensus of 8.2%.

This trend of downward revisions to continue through Q1 2025 earnings season.

These revisions reflect both margin pressure from higher input costs and reduced consumer demand in the face of rising prices.

Inflation Outlook: Tariffs Add Fuel to the Fire

The Federal Reserve’s key inflation metric—the core Personal Consumption Expenditures (PCE) price index—increased by 0.4% in February, bringing the 12-month rate to 2.8%. While manageable on the surface, the inflationary potential of current tariff policy could push this number well above the Fed’s comfort zone.

CFRA projects that:

An average tariff rate of +20% could push core inflation near 5%.

This would further delay or restrict the Fed’s plans for rate cuts in 2025.

Rising costs will also likely erode household purchasing power and reduce corporate profit margins—both of which contribute to the broader economic drag.

Asset Allocation: CFRA’s Tactical Recommendations

Given this evolving risk landscape, CFRA recommends a more conservative asset allocation strategy:

Reduce Equity exposure to 55% (45% U.S. / 10% International)

Increase Cash to 15%, up from 10%

Maintain Bonds at 25%

Maintain Commodities at 5%

These adjustments reflect a preference for liquidity and downside protection in the face of economic uncertainty.

“Now is the time to rebalance risk. Investors need to account for policy-driven volatility, not just traditional economic cycle models,” says Beland.

Outlook Summary: Cautious, Not Catastrophic

CFRA still assigns a 60% probability to the U.S. narrowly avoiding a recession in 2025. But that margin is thin, and largely dependent on trade de-escalation.

GDP growth forecasts have already been revised:

From 2.1% to 1.7% for 2025

From 2.3% to 2.0% for 2026

Leading indicators such as earnings estimates, consumer sentiment, and investment activity suggest the risk profile is shifting to the downside. Investors should be preparing for a slowdown, even if it doesn’t reach the technical definition of a recession.

What This Means for Wealth Managers

Institutional allocators, hedge funds, and wealth managers must prepare for an economic climate where traditional signals (like employment) lag behind fast-moving policy decisions. In this environment, macro intelligence and real-time data become essential.

CFRA’s full macro report offers deeper insights into:

Scenario planning for different tariff outcomes

Sector-level winners and losers

Fiscal policy projections for the second half of 2025

Earnings trends and S&P 500 valuation risks

Capital market forecasts for bonds, commodities, and FX

Get the Full Macro Report – Recession Increasingly Likely

This blog merely scratches the surface of CFRA’s latest research. For institutional investors looking to stay ahead of volatility and protect portfolios, our full macro report provides the in-depth analysis and actionable recommendations needed.