Wall Street firms have raised their odds of a year-end recession, citing growing risks from President Trump’s escalating trade policies. But with tariffs creating whiplash for businesses and consumers alike, economists caution that the economic impact could arrive sooner than anticipated, casting uncertainty over the broader outlook.
As some Wall Street watchers have noted, the NBER’s Business Cycle Dating Committee, the official group tasked with declaring recessions, only makes the call after analyzing months of economic data. That means we often don’t know we’re in a recession until it’s already underway, or even over.
But there are yellow flags to pay attention to.
“How far to the point of no return — a recession?” Evercore ISI analyst Julian Emanuel asked in a Sunday note. “The answer lies in the jobs market.”
Widely seen as the economy’s last line of defense, employment has remained remarkably resilient — much like it did in 2022 and 2023 during the previous major wave of recession fears. But economists warn that strength may not hold through the back half of the year, particularly if prolonged tariff uncertainty continues to erode business confidence.
Read more: The latest news and updates on Trump’s tariffs
Already, early signs of stress are starting to emerge. On Tuesday, consumer confidence fell for the fifth straight month in April as uncertainty surrounding President Trump’s trade policy — and all of the administration’s flip-flopping — pushed inflation expectations higher and weighed on the labor outlook.
Similarly, new data from the Bureau of Labor Statistics showed March job openings fell to their lowest level in nearly four years, a sign that the labor market is continuing to cool.
And while weekly jobless claims remain historically low and below the 300,000 “red flag” rate, anecdotal reports of layoffs have widened, with companies like United Parcel Service (UPS), Meta (META), Chevron (CVX), Estée Lauder (EL), and others announcing job cuts in recent days and weeks.
“While labor market deterioration has yet to flash red, the warning signs are there — particularly if consumer or business sentiment materially worsens,” Emanuel said.
Economists say the first real cracks likely won’t appear in headline unemployment numbers, but in other indicators, such as a rise in initial claims from small businesses or a slowdown in hiring among large corporations.
Still, there’s no perfect gauge for assessing the labor market’s real-time health, and many US companies are treading carefully.
“Businesses have learned from past recessions that if they’re too aggressive in letting people go and making other permanent changes, those choices are very hard to reverse once the economy recovers,” James Egelhof, chief US economist at BNP Paribas, told Yahoo Finance.
Read more: 5 ways to tariff-proof your finances
Egelhof said businesses generally believe tariffs will moderate in the coming weeks and that the uncertainty surrounding trade will become clearer as the administration wraps up negotiations.
Case in point: the much-needed reprieve for automakers. On Tuesday, the White House confirmed the government will support automakers by not layering additional tariffs on foreign-made cars on top of the existing tariffs already imposed by the administration.
“Businesses don’t want to conduct layoffs because they’re afraid that much of this uncertainty will come down,” Egelhof said.
Plus, consumers are still spending, which has kept sales relatively healthy. If sales are disrupted or businesses have trouble stockpiling or pricing items, that could quickly lead to material labor market weakness.
Imperfect indicators
The wait-and-see approach on the tariff front has complicated efforts to get a clear, real-time read on the labor market’s current state and where it might be headed next.
According to Egelhof, indicators like the monthly Job Openings and Labor Turnover Survey (JOLTS) are inherently lagging. Jobless claims offer more timely insights, but that data has limitations too: In some states, unemployment benefits are relatively modest, which can discourage people from filing claims after losing their jobs.
Plus, in a tight labor market, workers offered severance packages may delay filing for unemployment benefits until those packages expire. Similarly, in Washington, D.C., economists have warned that delayed filings tied to DOGE-related government layoffs could distort the data since many laid-off workers will remain on payrolls after being placed on administrative leave.
Given these gaps, economists have increasingly relied on real-time, anecdotal evidence from businesses, mostly through earnings calls.
“We have heard from some industries, travel, for example, that they’re seeing demand softness and perhaps are pulling back a little bit on hiring, doing partial freezes and so on,” Egelhof said. “But right now, it’s not widespread.”
That creates a major challenge for the Federal Reserve. Pricing pressures, especially in categories like autos, are likely to show up quickly if tariffs stay in place. But clear evidence of labor market weakening will take longer to surface, making it even more challenging for policymakers to respond.
Friday’s April jobs report will be closely watched for clues. Economists surveyed by Bloomberg expect that the US economy added 133,000 nonfarm payrolls last month, with the unemployment rate holding steady at a solid 4.2%.
Still, many on Wall Street believe a full-scale labor market breakdown may not show up until mid- to late summer as tariffs make their way through the broader economy. In the meantime, soft data, such as business surveys and consumer sentiment, are painting a more pessimistic picture.
“We do think in the coming months the risk is for the unemployment rate to move up more materially and for payrolls to weaken substantially,” Kathy Bostjancic, chief economist and senior vice president at Nationwide, told Yahoo Finance on Monday. “But for now, I think you’re just seeing a real big pause in the economy.”
Even if the Trump administration reverses course on tariffs, economists caution that the damage may already be done.
“These type of actions create disruptions in the normal workings of the economy,” Eugenio Alemán, chief economist at Raymond James, told Yahoo Finance.
Alemán equated the current situation to what happened during the COVID-19 pandemic as consumers rushed to buy excessive amounts of toilet paper, causing it to disappear from store shelves.
One reason for the toilet paper shortage was that prices couldn’t be adjusted amid that surge in demand. When prices can’t be raised in response to higher demand, companies might decide it’s better not to sell at all. The more inventories accumulate, the deeper the eventual contraction could be, Alemán explained.
Recent data on business inventories shows that the inventory-to-sales ratio has decreased, meaning consumers are buying faster than inventories are piling up. However, this trend could reverse if consumers feel they’ve restocked their personal supplies and thus slow down their purchasing.
Adding to risks is the potential for tariffs to disrupt supply chains, much like during the pandemic. For example, incoming shipments at the Port of Los Angeles are projected to be down about 36% year over year for the week ending May 10, signaling possible trouble ahead for the flow of goods.
“This is something that could very well happen today,” Alemán said. “And that is when things really start to unravel.”
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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