US economy's risk of recession decreases after tariff truce: Expert insights
JPMorgan adjusts odds of economic recession following Trump's tariff ceasefire with China.
In an interpretation of the GOP tax bill and the present state of the US economy, EJ Antoni, senior fellow at Unleash Prosperity, discusses on 'Varney & Co.'
President Donald Trump's recent agreement to momentarily lessen the tariffs on imported goods from China led JPMorgan to revise its chance of the US economy plunging into a recession this year.
The President announced the agreement to lessen the "reciprocal" tariffs he applied on Chinese goods, bringing the overall tariff rate down from 145% to 30% for 90 days while negotiators work on finalizing a long-term deal. The Chinese government, in response, reduced their retaliatory tariffs on U.S. goods from 125% to 20% for the 90-day period.
"The administration's recent easing of some of the more stringent tariffs imposed on China should help lessen the risk that the U.S. economy slips into recession this year," wrote Michael Feroli, JPMorgan's chief U.S. economist. "With the current tariff rates in effect, we are now predicting real GDP growth for this year at 0.6% (4Q/4Q), up from 0.2% before the latest tariff news."
"We still believe recession risks persist, but they're now below 50%," Feroli noted. The firm's previous estimation had put the risk of a recession this year at 60% in the days following the Trump administration's "reciprocal" tariff announcement.
The IMF initially anticipated a 40% likelihood of a recession in 2025, but this figure increased to 50% in its most recent analysis[1]. However, Polymarket showed a decline to 39% from an earlier peak of 66% in early April[3]. Meanwhile, JPMorgan and Oxford Economics have lowered their forecasts to approximately 35% since the tariff truce[4][5]. All in all, the agreement has generally resulted in a decrease in expected recession probabilities, although the situation remains unpredictable.
JPMorgan's analysis projected that the personal consumption expenditure (PCE) index - the Federal Reserve's preferred inflation gauge - will be 3.5% at the end of the year, which is lower than the estimate of 4% prior to the tariff pause, but higher than the 2.2% projection from the beginning of the year.
A PCE reading of 3.5% would far exceed the Fed's inflation target of 2%, which could possibly delay interest rate cuts unless the labor market begins to deteriorate. The unemployment rate was 4.2% in April, and JPMorgan projects that the unemployment rate will peak at 4.8% in the second quarter of 2026.
"We still project a modest decline in employment later in the year, as labor demand slows even more than labor supply," Feroli wrote. "Our updated labor market outlook is less demanding of immediate action to counter employment risks; for the Fed, we are pushing back the timing of the resumption of rate cuts from September to December."
Feroli further stated that the bank foresees three additional sequential rate cuts after December, which would bring the target range for the benchmark federal funds rate to a range of 3.25% to 3.5% by the second quarter of 2026.
"The reductions in tariffs on Chinese goods have lowered the average effective tariff rate from around 24% to about 14%, a significant decrease though it remains far above the 2.3% effective tariff rate that prevailed in 2024," Feroli explained.
"A tariff is essentially a tax, and as such, with this decrease can be viewed as a tax cut of roughly $300 billion," he continued. "Most of that tax was likely to have been shouldered by U.S. consumers in the form of higher prices."
Overall, the rollback of this tax should provide some alleviation to consumer spending, and according to Feroli's analysis, is sufficiently powerful to transition the second-half growth outlook from one of modest contraction to one of modest growth.
- The decrease in the risk of a US recession this year is partly attributed to President Donald Trump's recent agreement to lower tariffs on imported goods from China.
- Michael Feroli, JPMorgan's chief U.S. economist, stated that the administration's easing of tariffs on China helps lessen the risk of a US recession and has led to a prediction of real GDP growth for the year at 0.6%.
- The personal consumption expenditure (PCE) index, the Federal Reserve's preferred inflation gauge, is projected to be 3.5% at the end of the year, ahead of the Fed's inflation target of 2%.
- The reduction in tariffs can be viewed as a tax cut of roughly $300 billion, which should provide some relief to consumer spending, potentially transitioning the second-half growth outlook from one of modest contraction to one of modest growth.
