Is the US really heading into a recession?

During last year's campaign, Donald Trump promised 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, hinting at challenges in achieving this goal.

Trump warned that lowering prices would be difficult and that the public should prepare for "some bumps" before he could bring wealth back to America. Simultaneously, analysts pointed out that the possibility of a recession is increasing given Trump's policies. This raises the question: Is Trump about to trigger a recession in the world's largest economy?

In the United States, a recession is typically defined as a prolonged and widespread decline in economic activity, characterized by soaring unemployment and falling incomes. Lately, many economic analysts have been issuing warnings that the risk of this occurring is on the rise. A JPMorgan Chase report raised the probability of a recession from 30% at the start of the year to 40%, warning that US policy is "drifting away from growth." Moody's Analytics' chief economist Mark Zandi also raised the probability of a recession from 15% to 35%, citing tariff factors.

These predictions come as the S&P 500, which tracks the 500 largest US companies, has fallen sharply. The index has fallen to its lowest level since last September, suggesting concern about the future. Part of the market turmoil is due to concerns about new import taxes, or tariffs, implemented by Trump since taking office. He has imposed new tariffs on products from the US's three largest trading partners and has threatened to expand the scope of tariffs, which analysts believe will raise prices and dampen economic growth.

Trump and his economic advisors have been warning the public to prepare for some economic pain while appearing dismissive of market concerns. This is a stark contrast to his first term, when he frequently cited 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 exacerbated investor concerns about his plans. Goldman Sachs raised its recession bet from 15% to 20% last week, calling policy changes a "key risk" to the economy. But it noted that the White House still has "the option to retreat" if downside risks start to look more serious. "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 has unveiled his tariff plans, many companies now face shrinking profit margins, while delaying investment and hiring as they try to figure out the way forward. Investors are also concerned about steep cuts to government staff and government spending. Brian Gardner, Washington policy strategist at investment bank Stifel, said businesses 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. This is a restructuring of the American economy," he said. "That's what's been driving the market over the past few weeks."

The US economy is already slowing, partly due to actions taken by the central bank, which has been raising interest rates to try to cool economic activity and stabilize prices. In recent weeks, several data points have shown the economy weakening at an accelerated pace. Retail sales fell in February, and consumer and business surveys show confidence has declined since Trump was elected, with major airlines, retailers like Walmart and Target, and manufacturers all warning of an economic pullback. Some analysts worry that the stock market decline could trigger further spending cutbacks, particularly 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 as 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 indicator of behavior in recent years. "Despite the high level 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 closely linked to the rest of the world. "Tariffs could disrupt this link, and with signs that the US economy is weakening... this really adds to recession fears," she said.

The unease in the stock market is not just about Trump. Investors have already been nervous about a potential correction after a massive rally in tech stocks over the past two years, driven largely by investor optimism about artificial intelligence (AI). For example, shares in chipmaker Nvidia soared from less than $15 in early 2023 to nearly $150 last November. This surge has sparked talk of an "AI bubble" - and investors are highly attuned to signs that the bubble could burst, which would have a significant impact on the stock market, regardless of broader economic dynamics.

Now, as views on the US economy turn gloomier, optimism about AI is also becoming 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 "visibly" increased over the past month. "The bottom line is that if we enter a recession, the AI trade will be extremely difficult to continue," he said.