Investing.com - Growth in the U.S. is expected to be soft in the first quarter and downshift in the second half of 2025 as uncertainty surrounds Trump administration trade policies, although the underlying state of the world’s largest economy remains "generally healthy" enough to avert a recession, according to analysts at Wells Fargo (NYSE:WFC).
Economists have flagged that elevated international trade tensions, as well as a spell of bad weather in January, have clouded the outlook for U.S. activity so far this year.
U.S. President Donald Trump’s rapid-fire pronouncements on tariffs on both friends and foes alike have become a particular source of worry, with economists noting risks that the actions could refuel inflationary pressures and eventually dent the broader economy. Data in recent weeks has pointed to declining consumer confidence and sliding business activity, but inflation has continued to cool.
At the same time, Trump has also overseen a series of widespread reductions in the federal workforce, exacerbating concerns over the potential impact on the overall U.S. labor market.
Trump has argued that these moves are needed to overhaul U.S. trade imbalances, root out wasteful government spending and promote domestic job growth.
Yet fears that his tumultuous return to the White House could spark a wider recession have hit stock markets, with the benchmark S&P 500 dropping into correction territory -- typically defined as a more than 10% drop from a recent peak -- on Thursday.
In a note to clients, the Wells Fargo analysts acknowledged that uncertainty related to Trump’s tariff plans and massive federal government layoffs appear to have slowed some U.S. economic momentum and heightened the probability of a downturn in 2025.
"We look for real GDP growth to downshift in the second half of 2025 as tariff hikes lead to a modest uptick in inflation that erodes growth in real income, which weighs on growth in real consumer spending," the bank said.
Still, a downturn this year is not their base case scenario, the analysts added, noting that "the financial health of the aggregate household sector is generally strong at present" and most businesses do not need to make large cuts to payrolls.
"In our view, the solid underlying fundamentals of the U.S. economy should prevent it from slipping into recession this year," they said.
Meanwhile, the analysts predicted that the Fed will slash interest rates three times by the end of 2025 in order to provide support in case of a weakening in labor market conditions. In January, the Federal Reserve pushed pause on a policy easing cycle, saying it would take a wait-and-see approach to further interest rate cuts until the path ahead for the economy is clearer.