Yahoo Finance

Key Takeaways

• Recession fears reignited this week as a stock market sell-off put the S&P 500 into a correction.

• However, many economists and analysts feel that a full blown recession is still unlikely. Instead, they see a moderate slowdown ahead.

• Forecasters are keeping an eye on tariffs and consumer spending as they could signal slower than expected economic growth.

The sell-off in stock markets this week brought back recession chatter, but that doesn’t necessarily mean one is coming soon.

A full-blown recession is certainly possible and seems likelier after this week, particularly if spending from more cautious U.S. consumers plummets and prompts employers to lay off workers. But right now, the more likely scenario seems to be weaker growth, according to several economists and market analysts. Rather than firing on all cylinders, the U.S. economy may rise at a lackluster pace instead—which isn’t great news but is far from a panic signal.

“We believe the economy will avoid slipping into recession,” Wells Fargo economists wrote in a research note, pointing to “solid fundamentals” such as healthy household balance sheets as a buffer.

Even so, they noted the economy has already “lost some steam in early 2025,” which, combined with tariff uncertainty and federal government job cuts, could take a toll.

How Should You Think About the Stock Market Sell-Off?

Stocks haven’t recovered from Monday's plunge. Investors’ dumping of technology stocks has put the tech-heavy Nasdaq Composite Index more than 13% below its recent February peak. The S&P 500 index officially fell into a correction Thursday, where an index falls 10% from its peak.

A steep drop in stock markets is a “classic recipe for a slower pace of spending by the wealthy, who drive household consumption,” Joe Brusuelas, chief economist at the accounting firm RSM US LLP. When stock markets rise, the so-called wealth effect makes upper-income households feel wealthier and thus spend more, giving a boost to the rest of the economy.

Lower stock prices have the opposite effect, and wealthier households are likely to tamp down their spending this quarter, Brusuelas said. However, the U.S. economy can absorb some slowing without entering an extended contraction.

“The current growth scare is overstated,” Brusuelas said. “My sense here: We’re just seeing a classic late-cycle business slowdown.”

He expects the economy to grow at an annual rate of 1.5% this quarter, weakening from the pace of 2.5% or more in the last few years. But that’s not unusual, he said, noting that growth dipped into negative territory at the start of 2022 before continuing to power through.