Is the US economy headed for a recession?

Key takeaways

Recession worries are spreading, but analysts don’t expect a dire economic slowdown in 2025 andare looking for growth to reaccelerate next year.
Heightened risk factors like a rapidly cooling labor market mean the economy is more vulnerable to a negative shock.
Tariffs still have the potential to weigh on growth, business investments outside of the technology sector have been relatively stagnant, and new immigration restrictions are shrinking the labor force.

Amid a sharp slowdown in the labor market and the ongoing impact of new tariffs on consumers and businesses, worries are mounting that the US economy may be headed for a recession. That’s not the base case for most forecasters, but analysts are warning of an increasingly fragile economic balance as growth slows.

A rapidly cooling jobs market means that businesses are more reluctant to hire, and some job seekers are having a more difficult time finding work. At the same time, the labor force is shrinking thanks to a dramatic slowdown in immigration against the backdrop of the Donald Trump administration’s new restrictions.

New investments in materials and infrastructure from US businesses—with the major exception of the tech industry—have been relatively stagnant. President Trump’s new tariffs are still working their way through the economy and have the potential to weigh on consumer spending and business activity, at least in the near term.

“Recession risks are growing,” says Pimco economist Tiffany Wilding, who, like many others, does not see a major slowdown as her base case. She adds that right now, however, “the economy is more vulnerable to any kind of negative shock.”

To be sure, the outlook isn’t all doom and gloom. Many analysts expect growth to accelerate in 2026, as the shock from tariffs fades and new tax benefits come into effect. In the more immediate term, consumer spending is holding up, while corporate balance sheets still look solid.

“The tariffs are certainly hurting, but they’re not quite bad enough to get us to that recession,” says Samuel Tombs, chief US economist at Pantheon Macroeconomics.

Labor market slowdown

Right now, the most pressing challenge facing the US economy is the labor market, economists say.

“The labor market is more vulnerable today than at any point in this expansion,” says Ryan Sweet, chief US economist at Oxford Economics. His base case is that the US avoids a recession, but he characterizes the economy overall as susceptible to a slowdown, thanks in large part to pressure from the labor market.

Workers are feeling the pressure: a monthly, national survey of consumer expectations conducted by the Federal Reserve Bank of New York recently found that workers’ confidence in finding a new job, in the case of a hypothetical job loss, reached its lowest level since 2013.

Monthly payroll growth data for July and August came in significantly lower than analysts expected, and a slew of downward revisions to previous months’ data means that, in hindsight, the jobs picture looks much worse than it did a few months ago.

Those revisions showed that payrolls actually declined by 13,000 jobs in June—a warning sign of an impending jobs recession, says Marisa DiNatale, senior director of economic research at Moody’s Analytics. Negative numbers in the payroll data, especially in consecutive months, “almost always indicate that we are in a recession already or very close to one,” she says. DiNatale puts the odds of a broader recession at roughly 50/50 over the next year.

In addition, annual revisions to payroll data between March 2024 and March 2025 showed that the economy added more than 900,000 fewer jobs than previously estimated over the course of those 12 months.

The trend of downward revisions to hiring could continue, Pantheon’s Tombs says. “We might find that for the last couple of months, payroll growth has been overstated,” he says. “Payrolls are certainly flashing a red warning sign for the economy.”

Low hire, low fire

Muddying the picture is an unusual dynamic taking shape in the labor market. The “breakeven” level of jobs—economists’ term for the number of new jobs that need to be created each month to keep the unemployment rate steady—is now significantly lower than it has been over the past few years.

That means monthly job gains upward of 150,000 or even 200,000 are not likely to be the norm anymore. Analysts are getting used to a new baseline where significantly smaller monthly gains are more typical—an environment some are calling “low hire, low fire.”

On the one hand, demand for workers has fallen dramatically as businesses pause hiring amid an uncertain economic outlook. DiNatale points to Job Openings and Labor Turnover data showing that hiring has fallen to its lowest rate since 2013.

On the other hand, the labor supply has shrunk, with fewer people seeking to enter the workforce. New Trump-era immigration restrictions are a component of that shift.

Immigration restrictions reduce labor supply

A steady flow of foreign-born workers into the United States helped supercharge the labor force in recent years, especially in the aftermath of the pandemic, but new policies under President Trump are changing that dynamic.

“Less immigration is corrosive on the economy,” Oxford Economics’ Sweet says. “Economic costs can continue to mount.”

Pantheon’s Tombs estimates that the changes to immigration policy account for a roughly half-percentage point drag on gross domestic product growth. “It’s a factor in the slowdown,” he says.

Unemployment steady, for now

Steadily declining supply and demand in the labor market mean that the overall unemployment rate hasn’t changed much over the past few months. That’s a silver lining. Economists often point to a relatively low unemployment rate as a sign that economic conditions are not yet dire.

“We aren’t seeing massive amounts of layoffs,” DiNatale adds. She says that weekly unemployment claims have ticked modestly higher but are “not at a concerning level yet.”

If layoffs do materialize, Pimco’s Wilding expects them to affect smaller and midsize firms more than larger companies, which have more robust operations and balance sheets, can more easily offset tariff costs, and benefit from tax credits. “Can [smaller firms] weather this adjustment without more significant layoffs? That’s the risk,” when it comes to recession, Wilding says.

AI investment masking weakness

While the weakening jobs market is dominating the headlines, there are other economic forces at play. One positive for the economy has been the massive amount of investment related to artificial intelligence technologies.

As demand around AI continues to grow, American firms have been pouring money into new infrastructure such as software tools, physical data centers, and utilities capacity. That surge in investment has juiced the stock market and “masked weaknesses elsewhere in the economy,” says Sweet of Oxford Economics.

Pimco’s Wilding expects the tech investment cycle to add a full percentage point to GDP growth this year, while at the same time “all other investment [by businesses] in the economy is pretty stagnant.”

Tech investment is “cushioning the more cyclical parts of the economy that are turning down right now,” Wilding says. She adds that there is reason to believe the cycle can continue; demand for AI and related technologies shows no signs of slowing.

Tax bill offsets

Also tempering the gloom are expectations that the new tax bill passed by the Trump administration will boost balance sheets for both consumers and businesses in 2026, leading to stronger growth in the upcoming year.

“We’ve had a lot of the pain upfront in the form of tariffs,” says Pantheon’s Tombs. “But by the spring, we’ll be most of the way through that shock to households, and they will be starting to see some benefit from the tax cuts.”

Businesses are also expected to benefit from new tax breaks designed to encourage investment. Oxford Economics’ Sweet expects to see the strength in technology investments continue next year and even broaden out to other industries. “That should help keep the overall economy away from a recession,” he says.

On the other hand, DiNatale says that elements of the legislation could also be negative for growth, like the reduction in eligibility for Medicare and Medicaid. She expects many of the offsets for consumers to have the biggest effect on the high end of the income spectrum rather than the lower end, where they would be more impactful.

GDP holding up

For now, one of the most basic measures of economic growth still looks positive. Gross domestic product, the total value of all goods and services produced in the United States, increased 3.3% in the second quarter after falling into the negative in the first quarter, thanks to tariff disruptions.

Tombs is forecasting 1.5% annualized GDP growth in the third quarter—far from the rule of thumb that defines a recession as two negative quarters of growth. He points out that US firms are still “reasonably upbeat,” with plenty of cash on hand. “Corporate confidence has been supported in the last few months by the rebound in stock prices and loosening in financial conditions,” says Tombs.

But GDP is often an imperfect measure of real-time economic conditions. Data is released quarterly and subject to distortions like those seen earlier this year.

“A lot of people surmise that as long as the economy is growing in terms of GDP, then we couldn’t possibly be in a recession,” says DiNatale of Moody’s. “But given what we’re seeing in the job market, it feels very strange to say we’re not in a recession if people are losing their jobs.”

Tombs adds that GDP numbers can be revised, like many other series of economic data. “Often, it’s only after revisions do you see that the economy was contracting when looking at overall GDP.” He adds that payroll growth is often a better guide to the health of the economy than GDP numbers.

Where is the economy headed?

While analysts don’t see a guaranteed recession in the cards, most agree that in the short term, the economy is unlikely to return to blockbuster growth.

“I think we’re settling in for a period of quite slow growth now for a few quarters,” Tombs says.

“Things are probably going to get worse before they get better this year,” adds DiNatale. Tariff rates will likely rise before the end of the year, with the peak impact on the economy coming in the fourth quarter, she says.