A recession in the US might feel like a far-off event for UK investors, but as the old adage goes, ‘when America sneezes, the rest of the world catches a cold’.
The question of whether the US economy is heading for a recession has become a pertinent one, ever since Donald Trump’s ‘Liberation Day’ tariff announcement on 2 April kicked off a stock market sell-off and led to concerns about price rises and the future health of American businesses.
If the US were to plunge into a recession, and if the American stock market tumbled as a result, it could cause a harsh downturn in many investors’ portfolios, as the high US equity allocations that served them well in recent years backfires.
Indeed, the US occupies more than 70% of the MSCI World index and is home to many of the most popular companies amongst global investors’ portfolios, such as Alphabet, Microsoft, Amazon and Apple.
As a result, investors and fund managers are debating whether a recession could occur in the US this year and assessing whether their portfolios are positioned for this eventuality.
Below, Trustnet asks experts whether they expect a recession to unfold.
JP Morgan Chase – 60% chance of recession
Bruce Kasman, chief global economist at JP Morgan, believes there is a 60% likelihood of a recession this year.
Even after the 90-day pause on ‘reciprocal tariffs’, the universal 10% tariff and the escalating trade war with China could cause a tax hike worth 3% of US GDP – the largest domestic tax rise since the Second World War.
While Kasman conceded that recessions were inherently unpredictable, and not all of this tax rise would be paid, “what remains is still enough to push the US and China — and thus likely the global economy — into a recession this year”, he said.
This will impact the direction of monetary policy. He does not expect the Federal Reserve to begin cutting rates until September, at which point he anticipates “further rate cuts at every meeting thereafter through January 2026.”
Marlborough – Recession is the endgame
Recessions are inevitable, according to James Athey, fund manager at Marlborough. “If someone asks you, ‘will there be a recession?’ the only valid response is ‘over what time horizon?’” he said.
Attempting to time a recession is difficult, but recessions are ultimately a “self-fulfilling prophecy”, he continued. As consumer confidence starts to fall, people will spend less and unemployment will rise, rapidly moving into a recessionary environment. Consumer confidence has already fallen to a level “historically only associated with the worst global crises” and he expects it to deteriorate further.
“For now, the base case must be that we are in the late stage of a cycle. From here, a recession is the endgame,” Athey concluded.
Wellington Management – The US may already be in recession
Paul Skinner, investment director at Wellington, argued the spike in policy uncertainty is already impacting cyclical data and could easily spiral further. For example, he pointed to the Conference Board Consumer Confidence Index, which fell to its lowest level in five years last month.
The potential for higher inflation due to tariffs has forced the Federal Reserve to delay any further interest rate cuts, adding to market uncertainty.
While he conceded that a more positive resolution to trade negotiations could change things, mutually acceptable solutions for countries such as Europe and especially China will take time. As a result, investors should expect the near term to remain challenging.
“There is a reasonable chance that the US economy is already in recession,” he concluded.
Columbia Threadneedle – The US is embarking on an act of economic self-harm
For Anthony Willis, senior economist at Columbia Threadneedle Investments, the risk of recession is rising but it is “not our base case, for now”. Stagflation (stagnant economic growth combined with high inflation and rising unemployment) is the more likely outcome, he said, predicting sluggish US economic growth of 0.5% and unemployment increasing to 4.7%.
The US is embarking on an “act of economic self-harm” with Trump's volatile approach to tariffs and trade, he argued. This comes at a time when US exceptionalism is being increasingly challenged, as investors begin to worry about government deficits, high valuations and business confidence.
“Consumer sentiment data is very soft across all income levels. The Conference Board numbers are weak and closing in on pandemic levels and the University of Michigan survey of consumer sentiment is close to all-time lows. Worries over employment stand at levels normally seen only in recession.”
Nevertheless, Willis noted that soft data does not always translate into economic weaknesses. While volatility is likely to persist, the hard data does not currently point to all-out inflation, he said.
Stonehage Fleming – Preparing for a soft landing
Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas fund, is at the optimistic end of the spectrum and expects the US to experience a soft landing this year.
“The first point to make is that the hard economic data remains very firm,” he said. Indeed, the US employment figures released in April were supportive, with a larger increase in payrolls, stable levels of unemployment and solid earnings. The US consumer, it seemed, is in a relatively healthy place.
Smit added that the ratio of job openings to unemployment was currently around 1.07, indicating there are more openings than unemployed people, a positive sign for the economy.
He argued that if not for the soft data of tariffs, we “wouldn’t even be having this discussion about a recession”. Tariffs, he conceded, are undoubtedly disruptive and investors are waiting with bated breath in terms of how the 90-day negotiations will go. However, he said that “if nothing changes from here, the hard data will probably remain supportive”.