Recessions are a normal part of how the economy ebbs and flows. This time is different

At the start of the year, the U.S. economy had largely shaken off the remaining symptoms of COVID-19.

The 2020 pandemic recession was short-lived. The downturn economists predicted in 2023 and 2024 never materialized. The Federal Reserve had curbed inflation after a half-century high, accomplishing the elusive task of slowing the economy without crashing it.

“It looked like the Federal Reserve was about to declare mission accomplished, and that they were going to successfully land the plane on inflation without any serious fallout in terms of unemployment and layoffs,” said Scott Anderson, chief U.S. economist at BMO Capital Markets. “That’s no longer the base case.”

The U.S. isn’t in a recession, contrary to what many Americans believe. But the risks of a downturn have grown as President Donald Trump’s trade war raises prices, derails supply chains and whipsaws the markets.

“I’ve never seen uncertainty like this,” said John Beuerlein, chief economist at the Pohlad Cos. “And the reason is, the uncertainty is being created by one person.”

Unlike in previous moments of economic precarity — such as when the dot-com and housing bubbles burst — it’s unclear where federal policy is headed. What will happen after the 90-day pause on global tariffs? Will the U.S. reach a lasting trade deal with China? Where will the multi-trillion dollar government spending bill land? Will Trump fire Federal Reserve Chair Jerome Powell?

The unknown is the problem. Consumers and businesses are proceeding with caution, pulling back on spending and postponing big investments. The Fed is holding interest rates steady while it waits for the economic implications of federal trade, immigration, regulation and fiscal policies to become clear.

All of that is slowing the economy down.

“I’ve done a lot of work in my career as a professional economist looking at the economics of uncertainty, and it’s absolutely suffocating,” said Ryan Sweet, chief U.S. economist at Oxford Economics, at a virtual event May 2. “Businesses don’t know ... the rules of the road. Their knee-jerk reaction is just to sit on their hands, and that’s what they’re doing.”

If that uncertainty leads to layoffs, Sweet said, “then it’s game over.” Consumers will cut back further and businesses will lay off more workers to deal with the losses.

“And around and around we go into a recession,” Sweet said.

A recession is a prolonged and widespread drop in economic activity, often defined as two-consecutive quarters of declining gross domestic product (GDP), or the total value of goods and services a country produces.

The U.S. economy shrank in the first quarter this year for the first time since 2022, mainly because of an increase in imports and a drop in government spending, according to the U.S. Bureau of Economic Analysis.

That might have been a one-off as Americans rushed to buy imported goods such as cars and electronics before tariffs took effect, Anderson said.

Markets rallied Monday after U.S.-China talks over the weekend led to a temporary pause on tariffs between the two countries. The U.S. agreed to lower tariffs on Chinese goods from 145% to 30%, and China agreed to drop its retaliatory tariffs from 125% to 10%.

“While this reduces the odds of the U.S. and the world economies falling into recession, it’s too early to make wholesale and large upward revisions to our growth outlook,” Ben May, director of Global Macro Research at Oxford Economics, wrote in a report released Tuesday.

Negative GDP growth doesn’t necessarily indicate a recession. The U.S. economy contracted in the first two quarters of 2022, but the National Bureau of Economic Research (NBER) — which uses a range of data to officially mark economic highs and lows — didn’t define that as a recession, in large part because the labor market stayed strong.

The Fed started raising rates in March 2022. The central bank faced criticism for not acting sooner on post-COVID inflation, which economists have attributed to factors including supply chain issues and government stimulus spending.

A recession was a real possibility in 2023 and 2024 as rates reached a 25-year high. But the money the federal government pumped in to keep the economy afloat at the height of the pandemic probably helped avoid that, Beuerlein said.

Though he and other economists ratcheted down recession predictions after Monday’s trade deal news, the risk of a downturn is still high.

“The longer that there is this uncertainty, which prohibits the Fed from making any moves, the greater that chance of recession becomes,” Beuerlein said.

Uncertainty about where the trade war is headed has hamstrung the Fed, which is charged with steering the economy to keep prices stable and unemployment low.

With tariffs expected to raise both inflation and unemployment, interest rates — the central bank’s main tool — are useless. Cutting rates kickstarts the economy but can push inflation up; raising rates slows the economy down, potentially leading to a rise in unemployment.

The Federal Open Market Committee (FOMC) announced last week it had opted to leave rates unchanged, despite pressure from Trump to cut.

“‘Too late’ Jerome Powell is a FOOL, who doesn’t have a clue,” the president wrote Thursday on Truth Social.

If the White House ends up imposing tariffs at the century-high level proposed in early April, the Fed’s yearslong balancing act of quelling post-COVID inflation while keeping the job market strong could fall apart.

“At least for the next, let’s say, year, we would not be making progress toward those goals ... if that’s the way the tariffs shake out,” Powell said at a news conference last week. “The thing is, we don’t know that. There’s so much uncertainty about the scale, scope, timing and persistence of the tariffs.”

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