Investing.com - The U.S. economy is not tipped to slide into a recession, although the risks of a downturn remain elevated despite a trade agreement between the U.S. and China earlier this week, according to analysts at BofA.
In a note to clients, the brokerage noted that there is now a 35% chance that the world’s largest economy slides into a recession, adding that growth is expected to rebound in the second quarter after gross domestic product contracted in the opening three months of 2025.
But they flagged that a divergence between various data points is suggestive of a "fragile outlook".
"So far, there have not been as much substantial signs in the hard data such as April payrolls, with the other data preceding" U.S. President Donald Trump’s announcement of elevated tariffs on most countries, the analysts said. "Perhaps most distinctively, however, has been the historically sharp decline in consumer confidence and sentiment."
Meanwhile, their research indicates that there have been four recessions over roughly the past forty years, implying that the probability of such a decline in any given year is around 10%.
"So 35% is quite an elevated recession risk, even if an outright recession is not part of our baseline macro outlook," the analysts by John Shin and Ralph Axel said. "Of course, the agreement between the U.S. and China to lower tariffs for now has reduced recession risks and trimmed downside growth risks as well."
On Monday, Washington and Beijing announced that they had reached an agreement that would slash their sky-high respective tariffs on each other and halt the levies for 90 days.
The move comes after Trump slapped soaring duties of at least 145% on China, leading Beijing to respond with its own retaliatory tariffs of 125%.
Following the deal, the U.S. tariffs on China were brought down to 30%, folding in a baseline 10% levy and separate 20% duties related to Beijing’s alleged role in the flow of the illegal drug fentanyl. China, meanwhile, cut its tariffs on U.S. items to 10%.
Although the U.S. dollar strengthened after the announcement, the BofA analysts argued that companies may see value in "hedging against further weakness" in the greenback. The dollar is "moderately overvalued", they said.
Elsewhere, the analysts expect the Federal Reserve to leave interest rates unchanged for the rest of the year, helping push U.S. government bond yields to the "higher side".