Is the US headed into a recession under Trump?

Donald Trump promised during his campaign last year that he would lead the American people into a new era of prosperity. However, two months into his term, the picture he paints is slightly different. He warned that lowering prices would be very difficult and that the public should prepare for "a little bit of turbulence" before he could bring wealth back to the United States.

Meanwhile, analysts say the likelihood of a recession is increasing, pointing to Trump's policies as a factor. So, is Trump about to trigger a recession in the world's largest economy? In the United States, a recession is defined as a prolonged and widespread decline in economic activity, typically manifested by soaring unemployment and falling incomes.

In recent days, many economic analysts have issued warnings that the risk of such a scenario is rising. A JPMorgan Chase report raised the probability of a recession from 30% at the beginning of the year to 40%, warning that US policy "is drifting away from growth." Moody's Analytics chief economist Mark Zandi raised his recession probability from 15% to 35%, citing tariffs.

These forecasts come as the S&P 500, which tracks the 500 largest US companies, has fallen sharply to its lowest level since last September, indicating concerns about the future. Part of the market turmoil is due to concerns about the new import taxes, or tariffs, that Trump has implemented since taking office. He has imposed new tariffs on products from the United States' three largest trading partners and has threatened to implement them more broadly, which analysts believe will raise prices and curb economic growth.

Trump and his economic advisors have been warning the public to prepare for some economic pain while appearing to dismiss market concerns. This is in stark contrast to his first term, when he often touted the stock market as a measure of his success. "There will always be changes and adjustments," he said last week in response to calls from the business community for more certainty. This stance has heightened investors' concerns about his plans.

Goldman Sachs raised its bet on a recession from 15% to 20% last week, saying it views policy changes as a "key risk" to the economy. But it noted that the White House still has "options to retreat" if downside risks begin to appear more severe. "If the White House sticks to its policies even in the face of worse data, the risk of a recession will rise further," the company's analysts warned.

For many companies, the biggest question mark is tariffs, which raise costs for US businesses by taxing imported goods. As Trump unveils his tariff plans, many companies are now facing shrinking profit margins while also postponing investments and hiring as they try to figure out what the future holds. Investors are also concerned about massive cuts in government staff and government spending.

Brian Gardner, Washington policy strategist at investment bank Stifel, said companies and investors originally thought Trump intended to use tariffs as a negotiating tool. "But the signals coming from the president and his cabinet are actually much bigger. It's a restructuring of the American economy," he said. "That's what's been driving the market over the past few weeks."

The US economy has already slowed, partly by design of the central bank, which has kept interest rates high in an attempt to cool economic activity and stabilize prices. In recent weeks, some data has shown that the economy is weakening at an accelerating pace. Retail sales fell in February, and consumer and business surveys show that confidence rose after Trump's election but has now declined. Companies, including major airlines, retailers such as Walmart and Target, and manufacturers, have warned of an economic pullback.

Some analysts worry that a stock market decline could trigger further spending cutbacks, especially among higher-income households. This could deal a significant blow to the US economy, which is driven by consumer spending and increasingly reliant on these affluent households, while lower-income families face inflationary pressures.

US Federal Reserve Chairman Jerome Powell offered assurances in a speech last week, noting that sentiment has not been a good measure of behavior in recent years. "Despite the high degree of uncertainty, the US economy remains in good shape," he said. But XTB's head of research, Kathleen Brooks, warned that the US economy is currently tightly linked to the rest of the world. "The fact that tariffs could disrupt that, at the same time as there are signs that the US economy is weakening...that really adds to the recession fears," she said.

The unease in the stock market is not solely caused by Trump. Investors were already nervous about a potential correction after a sharp rise in tech stocks over the past two years, fueled by artificial intelligence (AI) investor optimism. For example, shares of chipmaker Nvidia soared from less than $15 in early 2023 to nearly $150 last November. This surge has sparked debate about an "AI bubble" – with investors highly alert to signs of its bursting, which would have a significant impact on the stock market, independent of broader economic dynamics.

Now, as views on the US economy darken, AI optimism has become harder to sustain. Gene Munster, a tech analyst at Deepwater Asset Management, wrote on social media this week that his optimism has "taken a step back" as the probability of a recession has "noticeably" increased over the past month. "The bottom line is, if we enter a recession, the AI trade will be extremely difficult to continue," he said.