Recession Worries Return
2Q 2025
By Cliff Aque, AIF®, CFA
The stock and bond markets bounced back from their early April bottoms after “Liberation Day” with the S&P 500 Index ending June at an all-time high[1]. Investors largely shrugged off geopolitical tensions and even the U.S. debt downgrade by Moody’s. However, persistent trade policy shifts have made uncertainty the defining theme of 2025, weighing heavily on consumer and business confidence. Despite the weakness in sentiment, the “hard data” has remained fairly strong with continued growth in industrial production, retail sales, and payrolls.
The National Bureau of Economic Research (NBER) developed an index that measures economic policy uncertainty based media references. They found that policy uncertainty tends to raise market volatility and potentially foreshadow declines in investment, output, and employment in the United States[2]. As shown in the chart below, policy uncertainty is at its highest level since COVID and more than double what it was during the Great Financial Crisis. This rising uncertainty has raised recession odds and market volatility.
So far in 2025, job cuts have totaled 744,308 (with 288,628 in government), the highest year-to-date since 2020[3], but layoffs slowed in June, and unemployment ticked down slightly from 4.2% to 4.1%[4]. Wage growth remains positive, giving the Fed room to hold interest rates steady. Still, inflation remains stubborn: core PCE rose to 2.7% in May, up from 2.6% in April—not the direction the Fed wants.
According to the Bureau of Economic Analysis (BEA), the U.S. economy contracted at an annual rate of 0.5% in the first quarter of 2025. This was due in large part to the policy uncertainty with companies driving a surge in imports ahead of tariffs and a slowdown in consumer spending from 4% at the end of 2024 to just 0.5% in the first quarter. Despite these headwinds to growth, business investment and real final sales to private domestic purchasers rose, showing that economy still looks resilient. With the Big Beautiful Bill’s passing and potentially other pro-growth policies coming, the U.S. economy should keep chugging along.
Also muting any negative shocks to the economy are strong household and corporate balance sheets. Household liabilities as a percentage of net worth (~12%) has declined to its lowest level in 50 years and corporate cash as a percentage of long-term liabilities (~15%) has increased to its highest level in 60 years[5]. Also on the corporate front, profit margins remain high and leverage levels low, providing a solid foundation for the economy.
One book we’ve been discussing at Brand AMG is The Uncertainty Solution: How to Invest with Confidence in the Face of the Unknown by John Jennings. Its core message: ignore predictions, question narratives, and think long-term. This year’s volatility has underscored just how important staying diversified and taking the long view is. As always, we’re here to help you navigate whatever the market brings.
[1] Investors cannot invest directly in an index
[2] http://www.policyuncertainty.com/media/BakerBloomDavis.pdf
[3] Source: Challenge, Gray and Christmas, Inc.
[4] U.S. Bureau of Labor Statistics
[5] Source: Principal Asset Management