A recession in 2025 is becoming more likely as Trump’s policies take effect, economist Mark Zandi says

It is hard to fathom, but we are back on recession watch.

The U.S. economy was performing exceptionally well at the start of the year — arguably the strongest economy in the world — but big haphazard swings in economic policy have put us here.

Just a couple of months into the new President Donald Trump administration, the economy is suddenly struggling. The mounting global trade war and chaotic Department of Government Efficiency (DOGE) cuts to government workforce and spending have created unprecedented uncertainty and are weighing heavily on the collective psyche.

And this is before the mass deportation of undocumented immigrants reaches the scale Trump promised, and the debate over federal tax and spending policy reaches full tilt.

The odds of the economy suffering a recession in the coming year are uncomfortably high. I would put them at over one-third and rising. At the start of the year, there was little chance the economy would falter.

Recession odds would be even higher if we didn’t expect the president to pivot on his policies in time to avoid a downturn. That pivot will happen when push comes to shove, and it becomes clear that without a change in course stock prices will decline further, and the economy will suffer a contraction. The economy will be diminished but not derailed.

President Trump made such a pivot in the trade war during his first term. He relented when it became evident that U.S. manufacturing was contracting, and the federal government cut checks to farmers to cover their loss of export sales to China. Trump renewed the United States-Mexico-Canada Agreement free-trade deal and struck a trade agreement with China.

He could do this again, more or less, as the next scheduled redo of the USMCA trade agreement is coming up.

But I don’t say any of this with confidence.

The current trade war is already much larger than the one during Trump’s first term. The president has increased tariffs on nearly $1 trillion in imports from Canada, China, and Mexico, and on all steel and aluminum imports. In his first term, the tariff hikes were on less than $400 billion in primarily Chinese goods.

The next salvo in this trade war will come in just a few days, when the president has threatened to impose broad-based, so-called reciprocal tariffs. That is, the U.S. will increase tariffs on other trading partners consistent with the tariffs and nontariff trade barriers taken by those nations on the U.S.

This is unlikely to occur on the scale threatened and not immediately given the complexity of implementing reciprocal tariffs. Still, by this summer, the U.S. effective tariff rate, which was close to zero before Trump’s first term, will be double-digit.

It will not have been that high since the catastrophic Smoot-Hawley tariffs that are rightly blamed in part for the Great Depression of the 1930s.

Of course, trade policy is not the only problematic economic policy. There are the DOGE cuts to government jobs and spending.

So far, the cuts have been small, but even if they eventually do not amount to much, the turmoil they seem to create throughout the government is unnerving and risks the failure of important government functions.

Add to that a more restrictive immigration policy, especially stepped-up deportations, for which the administration appears to be gearing up. Industries that regularly struggle to find workers and rely on immigrants could be hurt. The construction, agriculture, leisure and hospitality, manufacturing, and distribution industries are most at risk.

Then there is the tax and spending legislation that the dysfunctional Congress must come to terms on soon. Otherwise, everyone’s taxes will go up next year.

Because the tax cuts cost so much, and our budget deficits are already so large, lawmakers are weighing what other government programs to cut. Even Medicaid, the entitlement program that provides health care to lower-income Americans and long-term nursing home care, is at risk.

If that’s not enough, Congress must increase or suspend the Treasury debt limit again before the government runs out of cash and cannot pay its bills. Without getting into the details here, this always-scary drama is set to heat up again in the coming weeks.

The economy entered this year performing exceptionally well with strong growth, low and stable unemployment, cooling inflation, and easing interest rates. Yes, there were problems such as the shortage of affordable housing and the nation’s fiscal situation. But those problems were long in the making and not imminent threats to expansion.

Conditions have changed quickly.

Uncertainty and angst over a mounting global trade war and big shifts in other economic policies are doing meaningful economic damage. Growth has slowed, and the Fed has put monetary policy on hold.

A recession remains less than likely, but risks are rising. It is prudent to go on recession watch.