Economist: Uncertainty reigns in ’25 amid potential tariffs, recession

The U.S. economy will likely slow this year, with the scope of the slowdown depending on tariffs and their impact on inflation, said UMB Chief Investment Officer Eric Kelley..Kelley’s comment came during an hourlong webinar attended by approximately 180 people. The webinar was hosted by the Kansas City-based bank and BankBeat.Kelley said a recession is especially possible if U.S. tariffs on other countries are met with retaliation. “It is definitely not an insignificant possibility,” he added. On March 6, President Donald Trump postponed 25 percent tariffs on many imports from Mexico and some from Canada for a month as fears lingered over a more expansive trade war. There is a 30 percent chance of a recession for 2025-26, according to a March 6 forecast from the American Bankers Association Economic Advisory Committee. The committee said the risk will worsen if any tariffs remain for the rest of this year. Kelley said Trump’s tariffs could make it harder for him to meet his voter mandate of bringing inflation down. He sees current economic conditions leaving Trump with much less breathing room than in 2017. Tariffs on Canada and Mexico could cause inflation to rise to 3.3 percent on a one-time basis before returning to 2.5 percent in 2026, according to Deutsche Bank. The bank estimates inflation will fall to just over 2 percent in 2027 if tariffs remain. According to the EAC, personal consumption expenditures inflation will be 2.5 percent this year before ticking down to 2.4 percent in 2026. The economy is now showing signs of slowing, after being in expansionary mode for years, Kelley said. Consumer sentiment has fallen in recent months, and corporate bankruptcies are significantly higher than before the pandemic. Kelley said the relatively slow economy this year is not necessarily bad, and instead is needed to tame inflation. Unemployment has been low for a while, but is climbing, up to 4.2 percent in November from 3.5 percent in the summer of 2023. Kelley expects unemployment will grow to between 4.4-4.7 percent this year. “2025 is going to be the year of uncertainty on many fronts, and the trade war is going to add to that,” Kelley said. “It is going to impact sentiment in a lot of different ways, and we just have to be ready for it. That doesn’t mean that on its own causes a recession.”Kelley said the consumption growth fueled by pandemic-era stimulus dollars has tapered. Existing home sales have fallen significantly since 2022 as the inventory of for-sale homes has risen. The EAC predicted 2.1 percent real economic growth for both this year and 2026, “but with growing downside risks in 2025.” The committee expects any downturn in government purchases along with changes in trade policy as posing risks to capital expenditures and consumer spending. “We should expect a choppy year, a volatile year, but if the economy succeeds in growing … you should still have earnings growth,” Kelley added. “And as long as the Fed is able to send the signal that they are going to be doing a little bit of easing, it should hold up some of those valuations in the stock market. You still should get positive returns out of equities, but probably only single digits.” The EAC expects consumer credit quality will deteriorate over the next six months but predicts bank consumer delinquency rates will remain low, increasing to just under 3 percent this year from 2.75 percent in the fourth quarter of 2024. Kelley expects no more than two interest rate cuts this year, bringing the Fed Funds rate to between 4.0-4.25 percent. The EAC expects the Federal Open Market Committee will cut interest rates 25 basis points both this year and in 2026. Kelley noted the partisan divide in inflation expectations, making it more challenging for the Federal Reserve to effectively predict inflation. Under the presidency of Joe Biden, Republican voters had much higher inflation expectations than Democrats. Inflation expectations from the two parties have flipped since Trump took office in January. “I don’t see anybody try to talk about how to strategize around this,” Kelley said. “This is just a bit of a disturbing fact that this has become a political thing.”Kelley also described his debt outlook. The debt-to-GDP ratio is expected to be 180.6 percent by 2050. Treasury Secretary Scott Bessent has proposed a ‘3-3-3’ plan: Sustained 3 percent GDP growth, a fiscal deficit of no more than 3 percent of GDP, and a rise in daily domestic oil production of 3 million barrels. Kelley said 3 percent GDP growth is significantly above trend and likely only possible with a major rise in productivity, potentially fueled by artificial intelligence advances. He sees such gains in AI as unlikely in the next four years, but views them as possible in the next two decades.