U.S. inflation, recession forecasts ease on trade truce with China

Economists see slightly slower U.S. inflation this year after the U.S. and China reached a temporary trade agreement, which also helped reduce odds of a recession in the near term.

Forecasters in the May Bloomberg survey expect the personal consumption expenditures price index – the Federal Reserve’s preferred inflation metric – to peak at 3.1% at the end of 2025, a slight step-down from the 3.2% increase projected in April. They also marked down estimates for the consumer price index through early next year.

The median respondent now sees a 40% chance of a downturn in the next 12 months – down from a 45% estimate last month, but still much higher than the 30% expected in March. But forecasters also slightly trimmed their estimates for gross domestic product, and see a tepid 1.3% increase in 2025.

The Trump administration agreed to substantially lower tariffs on Chinese goods this month as officials work toward a possible trade deal between the world’s two largest economies. However, tariff rates are still notably higher now compared to before President Donald Trump took office, and lackluster consumer sentiment has corporate America worried about the outlook.

“Higher tariffs are set to weigh on growth and raise inflation, but are less likely to trigger a recession than feared last month,” said Comerica Bank economists Bill Adams and Waran Bhahirethan. “Tariffs do seem to have shifted economic growth into a lower gear, though.”

Helping the GDP print will be a bigger drop in imports – particularly in the current quarter, according to the survey. At the start of the year, imports surged by the most in almost five years as businesses scrambled to get goods in the U.S. ahead of tariffs, which led to the first negative GDP reading since 2022.

Economists still largely expect household demand to hold up in the face of heightened uncertainty. They forecast consumer spending to rise 1.5% in the second quarter, up from a 1% estimate in April. Still, that’s seen slowing down later in the year.

The outlook for business spending is less optimistic. Economists see private investment falling 5.2% in the current quarter, worse than the 3% decline projected in April. They also revised those estimates down through the middle of next year.

“The U.S.-China and U.S.-UK trade agreements are steps in the right direction but uncertainties remain,” said Olu Omodunbi, chief economist at Huntington Private Bank. “We expect slower growth in consumer spending and investment this year, compared to 2024.”

The survey was conducted May 16-21 and included responses from 86 economists.