A major credit rating firm said Wednesday that the U.S. economy is on track for a marked slowdown in 2025, even as inflation stays stubbornly high amid ongoing tariff effects.

The good news? A full-blown recession is still not the central scenario, easing fears that have permeated in recent weeks among investors.

In its latest quarterly outlook, S&P Global said it expects real gross domestic product growth to fall to 1.9% in both 2025 and 2026, a sharp decline from the post-pandemic rebound pace of 2.9% in 2023 and 2.8% in 2024. The agency anticipates growth to stabilize near 2.0% annually thereafter, marking a return to a slower long-run trajectory.

What's Driving The Slowdown?

A mix of weaker household income, receding fiscal support, higher interest rates, and a shifting trade environment marked by rising tariffs is dampening growth momentum.

S&P Global said these forces are acting in tandem to squeeze consumers and weigh on private-sector investment, while also increasing the cost of doing business across the economy.

The firm flagged that upcoming policy moves, including those from the Trump administration, could drag on growth before any stimulus effects from tax cuts or deregulation fully materialize.

The front-loaded nature of "regressive" measures—such as tariff hikes and potential federal workforce layoffs—has already led to a soft patch earlier than initially expected.

“President Trump’s April 2 date for reciprocal tariffs will keep financial market trading choppy,” the report said.

Labor Market Set To Cool

S&P expects the labor market to lose steam by mid-2025, with monthly job gains falling below 100,000, down from the current three-month average of 200,000.

The unemployment rate, now at 4.1%, is projected to rise to 4.6% by mid-2026.

"Public sector hiring, which significantly supported payroll growth in the past two years, is likely to slow down," the report said.

Is A Recession Likely?

While the tone of the report suggests caution, S&P is not predicting a recession as its base-case scenario.

“We don’t see a recession as the most likely outcome yet,” the report said.

The firm maintains a 25% probability of a downturn occurring within the next 12 months, citing growing uncertainty and cautious behavior from both consumers and businesses as factors that could tip the balance.

Inflation And Interest Rates: What To Expect

Inflation isn't going away soon. While the Federal Reserve continues to target a 2% inflation rate, S&P now sees price pressures lingering due to tariff pass-through effects.

Core personal consumption expenditures—the Fed's preferred inflation gauge—are expected to reach 2.8% in the fourth quarter of 2025, pushed higher by rising supply chain costs and service price adjustments that have lagged goods inflation.

That said, S&P views the tariff-induced inflation bump as temporary, expecting price growth to gradually ease to 2% by 2027.

In terms of monetary policy, the firm forecasts the Fed will cut interest rates only once in 2025, by 25 basis points, ending the year with a federal funds rate between 4.00%-4.25%.

For longer-term rates, the 10-year U.S. Treasury yield is projected to hover around 4.0%-4.5% in 2025, gradually falling toward 3.4%-3.6% by 2027-2028.

Should bond yields drop as forecasted, Treasury investments such as the iShares 20+ Year Treasury Bond ETF stand to deliver positive returns.

What Could Turn The Tide?

S&P sees growth rebounding in 2026, albeit after a slow start. That recovery is expected to come from easing trade tensions, further Fed policy support, and a stronger external backdrop, including improved eurozone demand that could boost U.S. exports.

Still, the path forward is far from certain.

The firm noted a "high degree of unpredictability" around how the U.S. administration will implement its economic agenda—particularly when it comes to tariffs—and what ripple effects that might create for global supply chains and credit markets.

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