“We now expect real GDP to contract under the weight of the tariffs, and for the full year (4Q/4Q) we now look for real GDP growth of -0.3 per cent, down from 1.3 per cent previously,” said Michael Feroli, the firm’s chief U.S. economist, in a note to clients, as reported by Bloomberg.
Feroli anticipates a two-quarter recession in the second half of 2025, with GDP shrinking 1% in Q3 and 0.5% in Q4. The cause? A dramatic escalation in U.S. trade policy under President Trump.
Trump’s tariffs shake the markets
Just days earlier, Trump unveiled sweeping new tariffs — a 10% base duty on all imports, with harsher levies on select partners like Mexico and Canada. Markets were quick to react. The Dow Jones Industrial Average plunged 2,231 points on Friday alone, its worst day since the pandemic crash of March 2020. The S&P 500 fell 6%, and the tech-heavy Nasdaq dropped 5.8%, pushing it into a bear market.
Altogether, U.S. markets lost $5.4 trillion in value over two trading sessions.
Trump’s latest tariff move adds to a growing list of trade battles. China has already hit back, slapping a 34% reciprocal tax on U.S. goods. Other nations are threatening to follow suit or enter tense negotiations.
Jobs and wallets on the line
Feroli warned that the economic slump could have painful consequences for American workers. “The forecasted contraction in economic activity is expected to depress hiring and over time to lift the unemployment rate to 5.3 per cent,” he wrote.That would be a steep climb from the 4.2% unemployment rate reported in March by the Bureau of Labor Statistics. And while hiring in March looked strong, JPMorgan expects that momentum to fade as tariffs bite into corporate margins and consumer demand.
“The pinch from higher prices that we expect in coming months may hit harder than in the post-pandemic inflation spike, as nominal income growth has been moderating recently,” Feroli added. “Moreover, in an environment of heightened uncertainty, consumers may be reluctant to dip too far into savings to finance spending growth.”
Stagflation risk returns
Inflation is also expected to surge. Feroli projects the Fed’s preferred inflation measure — the core Personal Consumption Expenditures (PCE) index — to climb to 4.4% by year-end, up from 2.8% in February.
That sets the stage for what Feroli calls a “stagflationary forecast” — a dangerous blend of rising prices and slowing growth.
“If realized, our stagflationary forecast would present a dilemma to Fed policymakers,” he said. “We believe material weakness in the labor market holds sway in the end, particularly if it results in weaker wage growth thereby giving the committee more confidence that a price-wage spiral isn’t taking hold.”
Fed under pressure to cut rates
In response, Feroli expects the Federal Reserve to start cutting rates in June, with further reductions at each meeting until January 2026. That would lower the benchmark interest rate to a range of 2.75% to 3%, from the current 4.25% to 4.5%.
However, not all Fed officials appear in a rush. “It feels like we don’t need to be in a hurry,” said Fed Chair Jerome Powell on Friday, shortly after the latest jobs data was released.
Still, financial markets are betting on at least four rate cuts this year as concerns mount over recession risks.
A wider consensus forms
J.P. Morgan isn’t alone in downgrading its forecast. Barclays now also sees a contraction next year. Citi expects growth of just 0.1%, while UBS has lowered its estimate to 0.4%.
UBS Chief U.S. Economist Jonathan Pingle noted the broader implications: “We expect U.S. imports from the rest of the world fall more than 20 per cent over our forecast horizon, mostly in the next several quarters, bringing imports as a share of GDP back to pre-1986 levels. The forcefulness of the trade policy action implies substantial macroeconomic adjustment for a $30 trillion economy.”
Whether the Fed can steer the U.S. economy through this turbulence remains to be seen. For now, J.P. Morgan’s call stands as a stark warning — not just of recession, but of a deeper structural shift in America’s economic direction.
With Trump’s trade gamble rattling allies, consumers, and investors alike, the U.S. could be entering a volatile chapter defined not by growth, but by retreat.
