The first 100 days of the second Trump administration has undoubtedly delivered a large shock to the U.S. economy. Still, the small negative growth rate in the first quarter of 2025 is assuredly not the start of a Trump-driven recession. The economy came into 2025 with good momentum, and final demand (real spending by consumers, businesses, and government) growth in the first quarter expanded by 2.3% SAAR. It was the surge in imports—rushing to stockpile before President Trump’s tariffs hit—that caused the negative estimate. Beacon Economics anticipates better growth in the second quarter, a point of view supported by strong March consumer spending numbers, as well as solid April employment numbers.

Nevertheless, our forecast for the U.S. economy now includes an increased probability of a recession in the next twelve months: we estimate a 30% likelihood in the coming year. This is lower than the average (45%) in the most recent Wall Street Journal ‘Economic Forecasting Survey’, but it’s the highest probability Beacon Economics has estimated since the start of 2020. Our lower estimate does not mean that we are more optimistic than other forecasts—we are very worried about the health of the U.S. economy. But our concern stems more from chronic issues, rather than the acute problems being brought on by the current administration’s rapidly changing policies.

As chaotic as they may be, we don’t believe President Trump’s wave of policy gyrations are sufficient to cause a recession in and of themselves. Many of the administration’s policies (and policy reversals) have little to do with current economic flows, regardless of their potential long run impact on the nation. The Department of Government Efficiency (DOGE) driven spending cuts are minuscule relative to the scale of Federal spending. Tariffs are clearly the largest risk, and the President has thankfully continued to back down from many of his more draconian threats—at least for now. As for the wobbly and uncertain equity market, it doesn’t compare to the ongoing strength of U.S. household finances, namely record high net worth and growing real disposable income. In the end, when it comes to U.S. business cycles, the consumer is king, and spending is driven by income and wealth, not sentiment.

Beacon Economics is most worried about how the rising instability of the markets will impact chronic problems that have been building in the U.S. economy for years. Those chronic problems are the unsustainable structural imbalances that make up the foundational strength of U.S. household finances, namely: asset bubbles and enormous government deficits. Household net worth in the United States is at an all-time high because the nation’s asset markets are in the midst of a massive bubble. Household incomes are artificially high because the Federal government has been borrowing rather than taxing to fund a significant portion of its spending.

All of this excess has thrust the nation into another massive consumption binge, not unlike during the runup to the Great Recession, marked by an enormous gap in the trade deficit (the difference between what the nation consumes and what it produces). Back then, like now, our consumption was ultimately paid for by strong inflows of foreign capital. On net, the nation imported $1.25 trillion dollars in capital in 2024, as a share of GDP that amount was only exceeded in the two years leading up to the Great Recession. The only difference is that back then the foreign capital was converted into household debt, now it is being converted into public debt.

This is why Beacon Economics cautioned in our last U.S. Outlook to pay more attention to what the Trump administration doesn’t do—namely attempt to close the Federal deficit, cool over-heated asset markets, and counsel Americans to spend within our means. At some point reality will reassert itself, and the nation will be forced to go through the painful transition of bringing its consumption back in line with its output. In the runup to the Great Recession the trigger was the turning of the housing market and the subsequent collapse of asset backed-security markets. The mechanism will be different this time since it is public rather than private borrowing that is at the heart of the current stress. This means that piercing the fortress around strong consumer finances will have to come from a dramatic reset in public spending, not private lending. But the ultimate outcome will be the same.

The unknown right now is whether the uncertainty being created by President Trump’s wave of wild policy gyrations is sufficient to ignite a broader financial crisis through the nation’s external accounts (i.e. the value of the dollar). We saw a brief example of what that might look like in April, when equity and bond markets both fell alongside the dollar. But since the President has backed off from his tariff plans the U.S. stock market has regained well over half the ground it lost since the tariff twists and turns began, and we have seen both the bond market and the $US gain ground. If the President really does refrain from the worst of his inclinations, then there is a high likelihood that the economy will return to the equilibrium state it was in before he took office—and the expansion will continue after this brief crisis point.

But this wouldn’t mean we are out of the woods. While the nation is distracted by the current policy chaos coming from the executive branch, the Republican controlled legislative branch of the U.S. government is shredding budgetary process norms in order to extend and expand Trump’s tax cut from his first administration, despite the fact that the Federal deficit in the first three months of 2025 was a whopping $600 billion, 8% of U.S. GDP. Economists have been taking about the risks of Federal debt for a long time, but it has never seemed to matter much to policymakers in the past. Why is it now such a risk? It isn’t the level of debt that is the greatest risk, but rather the pace at which we are adding to that debt. Consider that in 2024, the nation’s Federal debt grew by $2.2 trillion, while the external capital account deficit was $1.25 trillion. In other words, well over half of the capital that is funding the Federal deficit came from the rest of the world. Read: The U.S. government is very dependent on a strong dollar.

Of course, these foreign investors are not likely to directly buy treasuries. They are more likely chasing U.S. equities, perhaps real estate assets, or maybe even cryptocurrency. The Federal Reserve’s effort to tighten the U.S. money supply in 2022 and 2023 failed to pop the asset bubble they created via their excessive pandemic stimulus in 2020 and 2021 because it was offset by the net $2.3 trillion in global portfolio investment that has poured into the U.S. economy since then. The asset bubble has been Sirens’ call for attracting this foreign investment. Indeed, the demand to invest in the United States pushed the real value of the dollar to a 40-year high. The beginning of the end will start with a rapid depreciation of the dollar when foreign investors start to pull their capital out.

Through their actions, President Trump is trying to light the fuse while Congress is pouring on more explosive fuel—which seems like a skit from a vaudeville show rather than governance in the most powerful nation on the planet. And if the President fails to light the fuse, the fuel pile will still be there waiting for the right spark. Clearly this is unsustainable and the longer it continues the harder the reset will be on the national and global economy. If you are wondering how Congress could be so irresponsible, remember that our political choices reflect the national narrative—and that narrative, amazingly, is that Americans are suffering despite all the obvious signs of overconsumption. This is exactly where the risks to the ongoing U.S. economic expansion lie—within the gap between the believed narrative and objective, data-based, economic reality.