US economy in recession soon? State-level data signals downturn ahead as Moody’s warns Trump’s tariffs add looming risk

U.S. economy is flashing mixed signals, and that’s exactly what has experts on edge. Mark Zandi, Chief Economist at Moody’s Analytics, is warning that the nation could be teetering on the brink of recession by the end of 2025—even as some headline numbers still look strong.

Take Gross Domestic Income (GDI), for instance. It rose a surprisingly solid 4.8% in Q2 2025, offering a short-term boost after a shaky start to the year. But the underlying picture is softer: average growth in the first half of 2025 slowed to 2.5%, compared to 3.3% in the second half of 2024.

Corporate profits also bounced back, rising $65.5 billion in Q2 after shrinking in Q1. Yet, economists caution that these gains may not be enough to offset deeper structural problems—weak job growth, sticky inflation, and tariffs weighing on trade.

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This dual reality—resilient topline figures but faltering momentum underneath—is what makes the outlook so uncertain. If corporate profits keep recovering, they could help cushion the slowdown. But if growth keeps trending lower, especially in consumer spending and housing, the U.S. could still slip into recession despite the temporary bump in income data.

Why is job growth slowing and why does it matter?

Despite a still-low unemployment rate, the real momentum in hiring has all but disappeared. Payroll growth in 2025 has slowed to what Zandi calls a “virtual standstill,” and the labor force participation rate has stopped improving. Most gains are limited to health care, education, and government, while industries like manufacturing, construction, and logistics are stalling.

This slowdown matters because job growth fuels income and spending. If businesses shift from hiring freezes to outright layoffs, the knock-on effects can be severe: lower household incomes, weaker consumer demand, and reduced business revenues. That kind of cycle is how recessions typically begin.

How is inflation squeezing households?

Inflation has been hovering around 2.7% but could approach 4% by late 2026. While that may sound modest compared to the early-2020s spikes, it still erodes household purchasing power. Families already stretched by high rents, healthcare bills, and food prices feel the squeeze every month.

Tariffs are a key driver here. Companies delayed passing on costs as trade policies fluctuated, but as rates settle, price increases are becoming unavoidable.

This hits hardest in daily essentials — groceries, gas, utilities — the things Americans can’t cut back on easily. For many, that means dipping into savings or taking on debt just to maintain living standards.

Why is consumer spending flat despite low unemployment?

Consumer spending makes up nearly two-thirds of U.S. GDP. Yet in 2025, it has stagnated — the weakest stretch since the aftermath of the 2008 crash. Sluggish wage growth, inflation pressure, and economic uncertainty are pushing households to pull back.

This stagnation isn’t just about individual households. Businesses across retail, services, and hospitality are feeling the effects. Lower spending means tighter margins, which can prompt further job cuts or reduced investment. If consumer demand doesn’t rebound, the broader economy will struggle to maintain growth.

What is the housing market telling us?

Housing is another critical signal — and it’s flashing caution. With mortgage rates approaching 7%, affordability has worsened dramatically. Home sales have slowed, construction is cooling, and prices are leveling off in major markets.

A housing slowdown carries ripple effects far beyond real estate agents and mortgage lenders. It affects construction jobs, furniture and appliance sales, and even local tax revenues. If this weakness persists, it could deepen the slowdown already visible in other parts of the economy.

Which states could decide the recession outlook?

Not every region is struggling equally, but the states that matter most economically are showing cracks.

California and New York — together accounting for more than 20% of U.S. GDP — are among those where activity is slowing.

Zandi argues that if these economic heavyweights fall into recession, the national economy will almost inevitably follow. Conversely, if they hold steady, the U.S. might narrowly avoid contraction. For workers and businesses in those states, the stakes couldn’t be higher.

What role do Trump’s tariffs play in the slowdown?

The administration’s tariffs are shaping up to be a double-edged sword. On one hand, they are framed as tools to protect American industry. On the other, they are raising costs for businesses and consumers.

Companies are wary of being seen as hiking prices too aggressively, but the effects are already building into supply chains. If inflation accelerates while job growth continues to stagnate, tariffs could amplify the very downturn they were meant to shield against.

Fed and policymakers

The Federal Reserve faces a policy trap. Higher inflation usually argues for tighter monetary policy — raising rates to cool demand. But weak growth calls for looser conditions. With both risks colliding, the Fed’s moves will carry high stakes for households and businesses.

For Americans, this means interest rate shifts could directly affect mortgage payments, credit card debt, and small business borrowing. A misstep could either entrench inflation or tip the economy into a sharper downturn.

What should Americans watch in the months ahead?

The next few months will be decisive. Key data points to follow include:

• Job reports: Any consistent payroll declines will mark a clear recession signal.
  
  
• Inflation trends: Rising consumer prices will show how much tariffs are hitting households.
  
  
• Consumer spending: Flat or falling retail sales will underline weakening demand.
  
  
• Housing market data: If mortgage costs climb further and sales drop, housing could deepen the slowdown.
  
  

While Moody’s model currently puts recession odds at just under 50%, the risks are tightening. For households, that means preparing for volatility — from building emergency savings to managing debt carefully.

FAQs:

Q1: Is the U.S. economy already in recession?
No. Growth has slowed to barely above 1% in early 2025, but official data does not yet show a recession. Economists, however, warn the risks are higher than at any point since the pandemic recovery.

Q2: What are the clearest warning signs?
Weak job growth, persistent inflation, stagnant consumer spending, and a slowing housing market are the biggest red flags.

Q3: Could Trump’s tariffs push the economy into recession?
Economists say tariffs are already adding to inflationary pressures. If costs rise further while hiring weakens, tariffs could be the tipping point that drives the economy into contraction.