Are “Liberation Day” recession fears a thing of the past?

We think the U.S. economy will follow a similar trajectory. Our forecasts call for notable weakness in business investment in the second half of 2025, but we do not expect a recession in consumer spending or in overall economic activity.⁵

On cyclical versus event-driven bear markets

As noted, we explored recession risks for the U.S. economy in January, concluding that cyclical recession risks were low. Our models supported this view based on low private sector leverage, healthy corporate profit margins, decent economic momentum and the Fed no longer tightening monetary policy. However, we noted that exogenous shocks, unrelated to the U.S. business cycle, can also have significant impacts on markets. The new tariffs imposed by the Trump administration in 2025 are one such shock.

To differentiate between these event-driven bear markets and cyclical bear markets, which are often associated with U.S. economic recessions, we analyzed U.S. stock market data, isolating bear market episodes using daily data going back to the early 1980s.⁶

The chart below illustrates 11 bear market episodes, defined as a peak-to-trough decline in stock prices of more than 20%. Six of these were cyclical and five event-driven (the text labels indicate whether the episode featured a U.S. economic recession).

This year’s bear market and subsequent rebound highlight how swift the speed of these event-driven episodes can be. As of July 11, the stock market is only about 1.8% away from the previous peak, a swift rebound of 27% from the lows on April 8.

The difference between cyclical and event-driven bear markets makes intuitive sense. Cyclical bear markets typically involve economic imbalances that take time to resolve, such as the 2008–09 recession, when excessive debt leverage needed to be reduced, or the 2022–23 bear market, when inflation needed to be normalized through supply-side improvements and restrictive monetary policy.

In contrast, event-driven episodes last as long as the events themselves. These are often brief. For example, the lockdowns during COVID-19 slowed the economy dramatically, but were short-lived.⁷ Similarly, the Liberation Day Trump tariffs of 2025 were brief due to the policy reversals after April 2.

Still, we wouldn't be surprised if market volatility rises in the coming months as the hard economic data—on jobs, consumer spending and business investment—weakens toward our forecast, which calls for about 1% annualized GDP growth in the second half of 2025.⁸

That said, economic slowdowns can be messy and nonlinear if they undermine the U.S. labor market’s foundation. However, we remind readers that the Fed has significant firepower because its policy interest rate is still restrictive at 4.5%.

Since (as we’ve argued) the tariff shock likely isn’t big enough to cause a macro recession on its own, this means that the Fed is essentially in control of recession risk—as long as the economy is not hit by any new shocks. Thus, a U.S. recession at this point is nearly synonymous with a Fed policy mistake, which we don’t consider the most likely outcome.

We know some market watchers are concerned the Fed will be unable to cut rates if tariffs contribute to greater inflation. Here is why we think the Fed will be able to act despite the tariffs.

How can the Fed ease if inflation worsens?

Some investors ask how the Fed can cut rates to stave off recession risk if it’s facing an inflation threat related to tariffs. Our answer is that tariff-driven inflation would be very different from the housing/labor/energy-driven inflation shock that hit the U.S. economy in 2021–23.

We expect to eventually see higher aggregate inflation driven by higher inflation in finished goods sourced from overseas, and goods that rely on overseas components—even though there are few signs of it in data through June.⁹ However, inflation in the critical areas of housing, labor and energy has been stable, and it’s not obvious why tariffs would change this backdrop much. Tariff driven inflation represents a relative price shift; the more inflation in finished goods sourced from overseas, the less inflation we expect to see in domestic sectors, particularly services.

As long as these important inflation drivers remain tame, as is the case today (shown in the charts below), we believe the Fed will be able to cut its policy rate to support the current economic expansion if needed, even in the context of tariffs. The labor market will be the ultimate arbiter: If it softens further, as we expect, and the unemployment rate rises above 4.4%, then the Fed should have ample evidence to resume the rate cutting cycle that began in September 2024.¹⁰

An important note regarding energy inflation: We’re closely watching the rising geopolitical tensions between Israel and Iran. So far, bombings of Iran by Israel and the United States, and Iran’s counterattack, have not resulted in major supply outages in the global oil markets. Nevertheless, the situation bears monitoring.

We maintain our base case that the Fed is likely to cut its policy rate by another 75–100 basis points over the next 12–18 months. If growth is weaker than we expect, we would expect even more cuts than this baseline projection.¹¹

The media says macro, we see micro

The news media remains hyper-focused on a potential U.S. economic recession. Generally speaking, we think this discourse overlooks a significant structural change that came about following the 2008–09 global financial crisis. We believe (and we wrote in 2020) that broad U.S. economic recessions have become less likely, while micro recessions have become the new normal.¹²

We define micro recessions as substantial declines in employment and output that occur within a specific industry, even as broad macroeconomic data remains resilient. We observed micro recessions in the energy sector in 2015–16, brick-and-mortar retail in 2016–18, the manufacturing sector (due in part to tariffs) in 2018–19, and commercial real estate (centered on downtown office properties due to remote work) in 2023–24. In our view, the next six to 12 months will likely bring a new micro recession affecting businesses overexposed to international trade.

Why have micro recessions become more likely than macro recessions? Three broad phenomena probably contribute.

1. Aggregate private sector leverage has been subdued for the last 15 years, preventing a classic credit cycle boom and bust. One way of illustrating this is via the BIS’s private nonfinancial credit to GDP gap, which considers the deviation of private credit from its long-term trend (chart below).

According to the standard rules of macroeconomic accounting, the flip side of subdued private sector leverage is rising government leverage. We view the rising U.S. government debt stock as a risk, but more of a slow-moving, long-term risk than a key cyclical risk to the near-term macro outlook (as we’ve written previously).

2. The U.S. economy appears more service-oriented, with a more flexible labor market than in decades past. We can see this in the rising ratio of services production to goods production (chart below), and services are inherently less cyclical and less rate-sensitive than goods industries.

Owing partly to this shift toward a services economy, the U.S. labor market proved remarkably flexible during the 2021–23 inflation episode. Elevated wage growth (nearly 7% annually) faded away without widespread layoffs or a GDP contraction, helping the Fed achieve a soft landing in 2023–24. This would have been unheard of in the 1950s, ’60s or ’70s, when labor markets were more rigid and unionized.¹³

To be sure, lower unionization rates have created different problems related to income and wealth inequality and rising political populism. Nevertheless, from a business cycle stabilization perspective, this trend of unionization seems to make it less likely that central banks will need to address inflation shocks with recession-causing interest rate hikes.

3. Lastly, the Fed’s shift toward hyper-data dependency has, in our view, enhanced the precision of monetary policy. In previous decades, the Fed adhered to a rigid belief regarding the so-called “neutral rate,” managing monetary policy based on this estimate. Today, the Fed acknowledges the uncertainty surrounding the exact neutral rate, and instead relies on a variety of market-related and high-frequency economic signals to guide its decisions.

This pragmatic approach to monetary policy likely contributed to the soft landings following rate hikes in 2019 and 2023–24. We think it will make soft landings more likely in future cycles as well.

Conclusion: Where we stand

While cyclical recession risks remain low, event-driven shocks can still impact markets, and future shocks of this type are always possible. However, the U.S. economy’s resilience, supported by subdued private sector leverage and a services-oriented structure, suggests that micro recessions continue to be more likely than macro recessions.

One lesson from our work is that investors should try to separate event-driven market sell-offs from ones that are cyclically driven. Event-driven sell-offs usually present attractive opportunities for long-term investors, while caution is advised when markets are being driven by cyclical forces. As we navigate the likely economic slowdown coming from the new Trump tariffs, the Fed’s policy decisions will play a crucial role in maintaining macroeconomic stability.

We can help

For more information about our views on tariffs, rates and the economy, or how to position your portfolio in a way that meets your needs, contact your J.P. Morgan team.

¹"State of U.S. Tariffs, July 10, 2025,” The Budget Lab, Yale University, July 10, 2025. https://budgetlab.yale.edu/research/state-us-tariffs-july-10-2025

²There have been legal challenges to many of the tariffs the Trump administration has levied. It’s possible that these legal challenges may further reduce the effective tariff rate , but that isn’t our base case. Administration officials have said that if these legal challenges succeed, the administration will attempt to raise tariffs under other legal authorities, such as Section 301, 122 and, potentially, Section 388.

³A literal reading of the new tariffs announced in July would move the effective tariff rate up to the range of 15-20%, but our expectation is that it will settle at a lower level.

⁴World Trade Organization and World Bank, as of 2024.

⁵One nuance: We think tariff-related uncertainty will have little effect on business investment related to AI and electrical power, as these are driven by secular rather than cyclical factors. Recent business investment data shows a growing divide between AI-linked and non-AI-linked capex spending. See: Bridgewater Daily Observations, June 11, 2025. Furthermore, the passage of the One Big Beautiful Bill into law will likely prevent a severe downturn in business investment over the next year, given the provisions of the bill that support investment (e.g., accelerated depreciation).

⁶Our analysis used the Value Line Arithmetic Index rather than the S&P 500 because the former is broader (1,500 stocks) and equal-weighted. This means it puts lower weight on the mega-cap technology stocks. While these stocks dominate the S&P 500, the companies are labor-light, and therefore aren’t tied very intimately to the U.S. economy. Most macro strategists would say the Value Line Arithmetic Index is more closely related to the real economy than is the S&P 500—a sentiment we share.

⁷Unprecedented monetary and fiscal easing also played an important role in causing markets to rebound so swiftly in Q2 and Q3 of 2020.

⁸Neil Dutta has done a great job dissecting hard data weakness already “under the hood,” as it were, relating to: low dispersion of jobs growth in recent months, steadily rising continuing unemployment insurance claims, weakening prime age labor force participation, rising existing home sales inventory and weakness in construction sectors as per the Architectural Billing Index. Neil Dutta, “Monday Monetary Thoughts,” RenMac, June 9, 2025.

⁹To be clear, we are already seeing higher inflation from tariffs in certain subcomponents of aggregate inflation, such as household furnishings and recreational goods like toys and sporting equipment. However, through June, the inflationary pressure from tariffs has not been large enough to move aggregate or core inflation much, given the deflationary pressure from services, especially housing services.

 ¹⁰All of this presumes inflation expectations remain well behaved. We believe they will. Provided that this remains the case, the tariff effect on inflation should in the end be one-off, a point that Fed Governor Christopher Waller emphasized in a recent speech. “The Effects of Tariffs on the Three I’s: Inflation, Inflation Persistence, and Inflation Expectations,” Federalreserve.gov, June 1, 2025. https://www.federalreserve.gov/newsevents/speech/waller20250601a.htm

¹¹While recession is not our base case projection for the U.S. economy over the next 12 months, we think the risk of recession is somewhat elevated at 30%, compared to our baseline unconditional odds 12-month estimation of 10%.

¹²“Are Micro Recessions the New Normal?,” J.P. Morgan Private Bank, February 2020. Available on request.

¹³The immigration surge from 2022 to 2024 also helped rebalance supply with demand in the U.S. labor market.