Is there going to be a recession in 2025? Here’s how to prepare

Investor concerns regarding a potential 2025 recession grew in April, partially in response to the Trump administration’s global tariff policy and a historic four-day decline for the S&P 500. It’s important to note that volatility doesn’t necessarily signal a recession. J.P. Morgan Wealth Management’s 2025 Mid-Year Outlook sees signs of strength in the economy despite this volatility. 

Still the events put the potential for a recession front and center. While recessions are a natural part of economic cycles – the U.S. has experienced around 34 contractions since the 1850s, according to the National Bureau of Economic Research (NBER)  – it doesn’t minimize their potential impact.

Recessions can of course impact your finances, but there are ways to plan ahead and help shield yourself from their harmful consequences.

In this article we will break down the concept of a recession, highlight common indicators and suggest ways to prepare that could help you position yourself to handle this potential challenge.

First thing’s first: What is a recession?

A recession refers to a sustained decrease in economic activity, typically for a period of six months or two consecutive quarters. Typically, this leads to a decline in gross domestic product (GDP) and an increase in the unemployment rate.

What is the definition of a recession?

As mentioned above, a common definition of a recession, and one used by the International Monetary Fund, is two consecutive quarters with negative GDP growth.  While that benchmark is often used, it’s not exactly correct.

The NBER, an independent nonprofit, is widely recognized as the authoritative body on recession onset and conclusion dates. It considers a range of factors in its assessment, including personal income, unemployment, GDP and industrial production.

What are the signs of a recession?

Now that you know what a recession is, what are some of the signs to look for in the economy that we are either teetering on the edge of a recession or in a recession?

Some signs of a recession include:

Is a recession coming?

The big question on everyone’s mind: will there be a recession in 2025? While nobody has a crystal ball and can say with certainty, J.P. Morgan Research on May 27, 2025 lowered the probability of a recession to 40% – falling from 60% earlier in the year. This revised forecast is based on the latest trade policy developments, including the temporary tariff reduction between the U.S. and China.

“The recent backtrack on U.S.-China tariffs has altered our thinking in two important ways,” Joseph Lupton, a global economist at J.P. Morgan said. “First, the size of the tariff tax hike has been scaled down, imparting less of a purchasing power squeeze. Second, the quick unilateral tariff reversal by President Trump is signaling less tolerance for short-term pain, long-term gain. As a result, we no longer see a U.S. recession, but expect material headwinds to keep growth weak through the rest of this year.”

How to prepare for a recession: Key considerations

If you’re worried about the effects of an economic downturn, here are some steps to consider taking to prepare.

Conduct a financial audit

An economic downturn can pose a threat to your finances. But you can be on the defense and prepare ahead of time. To start, it’s key to get an understanding where you’re at financially and what financial resources you have.

Some steps to consider taking include:

Doing a financial audit can help you understand the big picture. You might realize that you’re doing better than you thought or find places where you’re more vulnerable.

Build up your emergency cash reserves

During a recession, there may be a spike in layoffs as companies downsize to weather the storm. Your cash reserves can be one of your biggest assets and a much-needed buoy in times of uncertainty.

To prepare for a recession, focus on building up your emergency cash reserves. In the event of a layoff, this can provide a financial safety net to fall back on.

It’s often advisable to save three to six months' worth of expenses. If you’re in a volatile industry or seeking greater peace of mind, you can consider saving up to a year’s worth of expenses.

Having a hefty amount of savings may help you avoid turning to high-interest credit cards or tapping into investments that you want to hold for the long term.

Consider reducing your spending

If a recession hits, you might be forced to reduce your spending. While adjusting your lifestyle and cutting back can be tough, starting the process earlier rather than later can make it less jarring if an economic downturn occurs.

Look at your discretionary expenses and identify areas in which you can reduce your spending. This can mean cutting out that lingering subscription that you no longer use or dining out fewer times a week.

Don't try to time the market

In times of economic crisis, investors may need resilience. Watching the stock market tumble can rattle your nerves and make you question what to do next. If you have a long-term investment horizon, it’s generally a good idea to stick to your investment plan. While taking action can give you a sense of control, making investing decisions in a moment of panic rather than with a cool head could have lasting consequences.

Over the last two decades, seven of the 10 best days in markets occurred within 15 days of the 10 worst days.  In other words, periods of significant stock market losses are often closely clustered with days of substantial gains.

Prepare to make adjustments

To prepare for a recession, you might need to adjust how you spend, save, invest and work. If you have a big-ticket purchase coming up, ask yourself: Can it be postponed? For instance, a car purchase may be unavoidable if it’s essential, but a four-city European adventure could potentially be delayed.

While you don’t want to time the market, you may want to ensure your investment portfolio is properly diversified and that your investments match your current risk tolerance and time horizon. Consider consulting with a financial advisor to review and make any adjustments to safeguard your portfolio during volatile times.

For those who are working and worried about the impact a recession may have on the labor market, consider obtaining new certifications or licenses to stay competitive, or even picking up a part-time job or freelancing gig on the side. Making these adjustments may put you in a better position to handle an economic downturn.

The bottom line

Recessions can have a lasting impact on your finances if you’re not prepared. They can also impact mental health, causing stress and anxiety, and sway consumer behavior toward frugality and saving.

While they’re unpleasant, recessions are part of the natural fluctuations of the economy. Making strategic moves when you feel like it’s necessary can improve your financial well-being and put you in a better position.

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