What a difference a year makes.
Last year the U.S. economy was robust, beating pre-pandemic growth estimates, and the envy of every other economy around the world. Unemployment was low. Wages were growing. Interest rates and inflation were falling. The Fed was pulling off the nearly mythical soft-landing, and the stock market was hitting new highs.
This year we have seen disinflation slow and even reverse, causing inflation to go up at times. While the labor market has weakened, wage increases have continued, contributing to inflation pressures.
Perhaps the single greatest shock to the system has been in the area of tariffs and trade policy. The broad imposition of tariffs has increased import costs, further fueling inflation and slowing economic growth. The seemingly arbitrary, on-again-off-again approach to these tariffs has sparked a variety of retaliatory measures from other countries, adding to the uncertainty.
That uncertainty has affected both consumer and corporate sentiment. On the former, personal consumption drove 69% of GDP growth in late 2024. With inflation resurgent and growing concerns about the labor market, that has slowed considerably in 2025, particularly in consumer durable goods.
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And, on the corporate side, the tariff and trade policy uncertainty and rising costs have led to delayed investments and hiring freezes. In addition, the inflation uncertainty has caused the Fed to maintain a tighter monetary policy, which inhibits capital expenditures (capex).
Drivers of Shifting Economic Forecasts
| Driver | Effect on Economy | Contribution to Shift |
| Persistent Inflation | Higher borrowing costs | Undermines real income, complicates Fed response |
| High Tariffs | Cost pushes inflation | Slows global trade, boosts prices, reduces growth |
| Weak Consumer Confidence | Cuts spending | Lowers demand, hits GDP, amplifies recession risk |
| Fed Caution/High Rates | Tightens liquidity | Sustains high costs, risks overtightening |
| Fiscal/Financial Fragility | Raises risk premia | Stress in bonds, potential asset bubble burst |
| Slowing Labor Market | Job/income loss | Weakens household demand, amplifies downturn |
The current consensus among economists and financial experts is that while the risk of a recession in the United States has meaningfully increased for late 2025 or 2026, the likelihood of a severe or extended depression—akin to the 1930s Great Depression—is low.
Most forecasts anticipate, at worst, a moderate to sharp recession lasting up to 18 months, rather than a multi-year economic depression.
Here is a summary of expert views and recent economic outlooks as of August 2025.
Multiple surveys and market strategists now estimate a 40% to 80% probability of a recession starting before the end of 2025, driven by high tariffs, persistent inflation, restrictive monetary policy, rising debt burdens, and political and financial volatility.
Several respected economists, including former Treasury Secretary Larry Summers, warn that the current environment is remarkably similar to those preceding extended contractions, but their primary concern is a standard or stagflationary recession, not a 1930s-like depression.
Large financial institutions (J.P. Morgan, Morgan Stanley, Deloitte) and global forecasting bodies (IMF, World Bank) do not predict a severe or extended depression—defined as a multi-year, double-digit contraction in GDP and structurally high unemployment. They expect the U.S. and global economies to remain slow-growing but resilient overall, barring an extreme shock or severe policy miscalculation.
- Morgan Stanley (May 2025): Expects global growth to slow to 2.8%-2.9% but no sustained contraction.
- J.P. Morgan (July 2025): Puts 2025 U.S. recession probability at 40%, but not depression; GDP growth expected to slow to 0.25% annualized in late 2025.
- IMF (April 2025): Sees “intensifying downside risks” but only expects modest global GDP weakness, not an extended depression.
- Forbes (April 2025): Notes economists put the recession odds at “65–80%,” but typical downturns last “10–18 months,” not multi-year depressions.
- The UCLA Anderson Forecast (Q1 2025) sums it up nicely:
“There are no signs of an imminent depression. The main risk is a multi-quarter recession or stagflation, but the foundation for a longer, cascading depression is not present under current conditions.”
What would cause a depression? According to many economists, a true depression would require a combination of factors not currently present or probable. These include a total collapse of the banking system or credit markets, extreme policy errors (e.g., protectionist trade wars taken to the maximum, as in the Smoot-Hawley Tariff era), and a global financial contagion and loss of confidence in the U.S. dollar or Treasury debt.
Again, these conditions are not considered currently present or probable.
What to Do Now
The stock market has been volatile in 2025 but has more or less regained the substantial losses earlier in the year. A recession, while more likely, is still uncertain – and in the future – so there is no reason for precipitous action. It is a good idea to review and make necessary adjustments, though.
In an environment like this, the importance of maintaining a diversified portfolio with exposure to resilient sectors (like healthcare and consumer staples) and quality fixed income only increases.
With the general uncertainty, the market volatility, and still-untamed inflation, this is definitely a good time to reduce leverage and variable-rate debt if possible. It’s always a good idea to have contingency plans, and I certainly advocate reviewing and updating them now, or creating one if you haven’t.
To reiterate, avoid “panic liquidation.” Most downturns have historically resolved within a year to 18 months, and for most investors, even those caught completely flat-footed, riding it out is not the end of the world.
How are you feeling about the economy and the market right now? Share your thoughts with me at support@cabotwealth.com.
For your investing success,
Ed Coburn
President, Cabot Wealth Network
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