When Is a US Recession Likely to Occur in 2025?
As of May 2025, the US economy appears to be moving out of the late expansion phase and approaching contraction. With key macroeconomic indicators showing weakness and trade tensions intensifying, the likelihood of a recession starting later this year is rising. In this article, we examine the most recent economic data to determine when a US recession is most likely to occur and how traders and investors should prepare.
Fundamental Analysis
GDP Contraction Signals a Turning Point
In the first quarter of 2025, US GDP fell by 0.3%, ending a three-year growth streak. This contraction was primarily driven by a surge in pre-tariff imports that disrupted trade balances, a decline in federal and state government spending, and slower growth in consumer services. While private demand held up, a second consecutive quarter of contraction would confirm a technical recession. Leading indicators are already pointing in that direction, with the Conference Board’s Leading Economic Index (LEI) down in 22 of the past 24 months.
Labour Market Weakness Is Emerging
The labour market is showing clear signs of cooling: the unemployment rate has increased to 4.2%, monthly job creation slowed to 177,000 in April, and initial jobless claims and the quits rate are trending lower. This weakening backdrop typically precedes recessions, as employment is a lagging indicator that turns after output starts falling.
Sticky Inflation and Restrictive Fed Policy
Core PCE inflation remains elevated at 3.1% year-over-year, above the Federal Reserve’s 2% target. While the Fed has paused rate hikes, it is not yet ready to cut due to persistent inflation in services, upward pressure from tariffs, and the need to maintain credibility. This means that real interest rates remain highly restrictive, dampening growth in investment, credit, and consumer spending.
Tariffs and Trade Disruptions
The April 2025 introduction of a 145% tariff on Chinese imports, alongside other protectionist measures, is a major supply and demand shock. Input costs are rising for manufacturers and retailers, consumer prices are being pushed higher, and business confidence is deteriorating. These conditions are similar to stagflationary episodes where growth slows and inflation rises.
Deteriorating Business Activity
The ISM Manufacturing PMI has dropped to 48.2, back in contraction territory, while ISM Services PMI slowed to 52.1, near the neutral level. Capex and hiring plans are being scaled back across sectors. This reflects a broad-based deceleration in economic activity that typically precedes a downturn.
When Is a US Recession Most Likely to Occur?
Based on the current data, a US recession is most likely to begin in the third quarter of 2025. If Q2 GDP is flat or negative, and current trends in the labour market and business investment persist, the NBER may confirm a recession by the second half of the year.
Recession Scenario Forecast Table
| Scenario | Probability | Expected Start | Key Drivers |
|---|---|---|---|
| Mild Recession | 55% | Q3 2025 | Negative GDP, tight monetary policy, weak capex |
| Soft Landing | 25% | Flat Q2–Q4 2025 | Steady labour market, resilient services spending |
| Deep Recession | 15% | Q4 2025 – Q2 2026 | Policy mistakes, corporate defaults, consumer pullback |
| Reacceleration | 5% | Unlikely | Policy stimulus, surprise productivity rebound |
Institutional Outlooks
- J.P. Morgan: 60% chance of US/global recession by end-2025
- Goldman Sachs: 45% probability of US recession
- Reuters Poll: 45% recession probability within 12 months
- Bloomberg Economics: 45% likelihood based on consumer retrenchment and inflation concerns
Sentiment Analysis
Consumer Sentiment
Consumer expectations are collapsing. The University of Michigan’s index is now at its lowest since 2008, reflecting fears over inflation, employment prospects, and future income.
Institutional Positioning
COT reports reveal that asset managers have trimmed long equity exposure and increased hedging activity. The VIX has moved above 20, while gold and Treasury demand is rising — both indicators of risk aversion.
Yield Curve Signal
The 2s–10s Treasury yield curve remains inverted at -45 basis points. This classic recession predictor is being closely watched, with rate futures now pricing in Fed rate cuts by early 2026.
Portfolio Allocation Guide for Recession Risk
With a mild recession as the most probable outcome, portfolio positioning should tilt towards defensive assets and reduced risk exposure.
Recession Strategy Allocation Table
| Asset Class / Sector | Allocation Bias | Rationale |
|---|---|---|
| US Equities | Underweight | Earnings downgrade risk, rising input costs |
| Global Equities | Slight Underweight | External risks from EU and China |
| Long-Term US Treasuries | Overweight | Safe haven, rate cut anticipation |
| Gold | Overweight | Hedge against policy risk and USD volatility |
| Oil and Energy | Underweight | Vulnerable to demand contraction |
| Real Estate (REITs) | Underweight | Rate-sensitive, facing financing pressure |
| Investment Grade Credit | Neutral | Safer credit expected to be stable |
| High-Yield Bonds | Underweight | Elevated default risk in downturn |
| Defensive Equities | Overweight | Healthcare, Utilities, Staples offer stable earnings |
| Cyclicals / Discretionary | Underweight | Income-sensitive, exposed to consumer weakness |
| USD (Cash) | Overweight | Demand for liquidity and capital preservation |
Conclusion
The US economy is approaching a recession, with most indicators pointing to a slowdown beginning in the second half of 2025. From GDP contraction and weak capex to inflationary pressures and falling consumer confidence, the signs are becoming harder to ignore. A mild recession remains the most probable scenario, with Q3 the likeliest turning point.
Investors should respond by rebalancing portfolios toward quality assets, defensive sectors, and safe havens such as long-duration bonds and gold. Reducing exposure to high-beta stocks and cyclical sectors is essential in preparing for what could be a volatile period in financial markets.
To deepen your understanding of macro cycles and recession-proof trading strategies, enrol in our Trading Courses tailored for market professionals and serious investors.
