By Megan Leonhardt

Wall Street and Main Street aren't always in sync, but lately they're singing the same mournful tune about the U.S. economy.

In the investment world, myriad market strategists are predicting an imminent economic recession tied to President Donald Trump's tariff policies. At the same time, consumer confidence has soured, with the Conference Board's Consumer Confidence Index sliding for a fifth consecutive month. These so-called soft indicators point to widespread worry about the economic outlook, notwithstanding last year's 2.8% growth in U.S. gross domestic product, adjusted for inflation.

Yet there are ample reasons to think the economy will avert a recession this year, even if the Trump administration doesn't roll back its tariff hikes further. The hard data, or objective measures of economic growth, employment, inflation, and retail sales, don't provide a clear picture so far of economic distress, and consumer data indicated continued growth in spending. That doesn't mean GDP growth won't slow, but the economy's residual strength suggests it may not contract.

The past week's economic data offered a mixed picture of the economy's strength, at least as of mid-April. (Trump's tariff hikes were unveiled on April 2.) GDP fell at an annual rate of 0.3% in the first quarter, according to the first estimate, released on Wednesday by the Bureau of Economic Analysis. But most of the decline owed to a 41% surge in imports in the period, as businesses attempted to get ahead of tariff increases. That's likely to be a one-time event, while inflation-adjusted final sales to domestic purchasers, considered the engine of the economy, gained 3%. Consumer spending rose 1.8% in the quarter, fueled by outlays for services.

The April jobs report, released on Friday, confirmed the economy's strength, with nonfarm payrolls up by 177,000 in the month, roughly in line with the average monthly growth trends over the past year. The unemployment rate stayed unchanged at 4.2%, within the range that the Federal Reserve equates with full employment.

Still, the U.S. has experienced what may be the largest tariff shock in a century. Accounting for the Trump administration's tariff hikes and retaliatory levies, the average effective tariff rate overall is now 28%, according to the Budget Lab at Yale University. That's the highest rate since 1901. In dollar terms, the tariff cost is estimated to be close to $1 trillion, estimates Conrad DeQuadros, senior economic advisor at Brean Capital.

The tariff threat has thrown planning into disarray across the corporate world, and Trump's delayed imposition of tariffs, together with rollbacks of certain tariffs, has fueled heightened uncertainty. Nor is there a guarantee of additional fiscal stimulus to offset any negative tariff-related impacts.

In his first presidential term, Trump signed the Tax Cuts and Jobs Act and cut regulations before imposing tariffs on certain imports. It's too soon to know the fate of the Republicans' latest tax bill.

There are some indications that a tariff-related hit could be deeper and more pervasive than a temporary supply shock. In the three weeks since the White House announced a 145% tariff rate on imports from China, the U.S.'s largest trading partner, data reveal that shipments to the U.S. from China have plummeted. Ocean-container bookings from China to the U.S. are down more than 60%, reports Ryan Petersen, founder and CEO of Flexport.

The U.S. imported $438.9 billion in goods from China in 2024, according to the Office of the U.S. Trade Representative. Most Chinese imports are transported by sea, so a significant drop in shipments could pose economic challenges in coming months.

"Our concern is that tariffs at this magnitude between the U.S. and China don't just slow trade but also cause a sudden stop when orders are canceled, importers don't take delivery, and you get a halt in trade flows," says Michael Gapen, chief economist at Morgan Stanley. "Presumably, employment would adjust rapidly and then spill over into other sectors."

Companies are already reducing financial guidance for coming quarters, or pulling it altogether due to tariff-related fears. Consumers are also unsettled, especially about the labor outlook. The latest existing-home-sales report, from March, could indicate a retrenchment by consumers, writes Gerard MacDonell, senior managing director at 22V Research, although he says the greater threat probably is "on the business side."

It was the slowest March on record for existing-home sales since 2009, falling 5.9% from February's level to a seasonally adjusted annual rate of 4.02 million, according to the National Association of Realtors.

Smaller firms, in particular, may find themselves caught in the tariff crosshairs, without sufficient financial wherewithal to fund operations if costs rise and sales decline. That has negative implications for employment and business investment. And it isn't only tariffs that are creating challenges.

While federal workers constitute less than 2% of the U.S. labor force, there are negative knock-on effects from the Department of Government Efficiency's recent cuts to spending and employment. A larger pool of private contractors is also at risk, as are others who serve the federal workforce. The Trump administration's immigration restrictions and deportations, meanwhile, threaten to erode both the supply of labor and the demand for goods and services.

Yet even with these policies creating a drag on parts of the U.S. economy, a recession -- defined as a significant and widespread decline in economic activity that typically lasts for more than a few months, as determined by the National Bureau of Economic Research -- isn't a foregone conclusion. Economists surveyed by Bloomberg expect real GDP to grow by 1.4% this year. But estimates vary widely: The Peterson Institute for International Economics sees average annualized growth of only 0.1% for the year.

Forecasts can change, and quickly, especially if the Trump administration doesn't strike tariff deals soon with China and other large trading partners -- or, conversely, if it does. But there is little evidence, so far, that Americans are changing their spending habits, despite the negativity displayed in sentiment surveys. Restaurant spending rose almost 2% in March, according to the latest retail sales data from the Census Bureau. Total credit-card spending across all households was up 3.1% year over year for the week ended on April 19, based on Bank of America's aggregated card data.

To be sure, many shoppers are pulling forward purchases to avoid a possible tariff impact. But the fact that households have the spending power to do so is noteworthy. Consumer spending accounts for about 70% of GDP, and high-income households account for roughly 50% of spending. Wage growth among this cohort continues to outstrip all others, helping to underpin bullish economist forecasts.

Household balance sheets are in good shape overall. As of March, median household deposit levels across all income cohorts were 15% above 2019 levels, even after adjusting for inflation, according to Bank of America. The savings rate was 3.9% in March, the BEA reported on Wednesday.

Credit-card balances remain largely in check compared with pre-Covid levels, although lower-income households are becoming more reliant on credit to maintain spending levels. Credit-card delinquencies declined month over month in March, and Americans' credit usage fell in the month, according to the latest available CreditGauge report from VantageScore.

If the labor market slows, lower-income households could be forced to rely even more on credit or cut back on discretionary spending, writes BofA economist Joseph Wadford. So far, labor conditions remain stable, with a low level of layoffs in the private sector and little pickup in unemployment claims this year. The four-week moving average of initial jobless claims was 226,000 as of April 26, still in line with prepandemic trends.

"We haven't really had a type of economic shock that would give you layoff activity," says Michael Feroli, chief U.S. economist at J.P. Morgan. "Usually, layoffs only happen when things get really bad. Firms usually adjust the workforce by modulating hiring flows."

The decline in the labor supply due to lower immigration could reinforce companies' reluctance to engage in large-scale layoffs. The consensus economic forecast puts the unemployment rate at 4.3% by year end, according to FactSet, suggesting there isn't a large pool of available labor for hire.

"Businesses seem to be holding on to workers," says Beth Ann Bovino, chief economist at U.S. Bank. "To me, that provides that cushion for households to continue to spend."

Even if the economy keeps growing this year, that doesn't mean the road ahead will be smooth. The regressive nature of tariffs is likely to leave lower-income households feeling squeezed. And the timing of tariffs could imperil growth in the year's second half rather than in the next few months. Earnings guidance so far also signals "that any adverse impacts from tariffs may be felt a little later in the year or even next year," writes Lori Calvasina, head of U.S. equity strategy research at RBC Capital Markets.

The Fed may ameliorate some of the pain by lowering interest rates in the second half of 2025, albeit not by the full percentage point that markets currently are expecting. If tariffs produce inflation, Fed officials may be able to justify looking through the effect on price levels, leaving them scope to cut rates if economic growth cools. "This is going to require some fancy footwork from [Fed Chair] Jay Powell and his colleagues," says Nathan Sheets, global chief economist at Citigroup.

For now, Fed officials believe the economy is stable enough to allow them to take a wait-and-see approach to easing monetary policy. But they are preparing for the potential need to intervene in the event of weaker economic conditions.

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May 02, 2025 12:01 ET (16:01 GMT)

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