Fears of slower growth have spiked as the stock market has fallen in recent weeks. However, recent reported economic data has shown growth and a healthy jobs market. It remains to be seen whether the fears of consumers and businesses are realized in recession, or if predictions of decline are overdone.
Recent Economic Data Has Been Positive
Recent reported economic data has been consistent with growth. The latest estimate for Q4 Gross Domestic Product is 2.3% growth. Unemployment is at 4.1% as of February, with the economy adding 151,000 jobs, similar to the past 12 months. That said, 4.1% unemployment is a slight rise from 4.0% in January. As a result, a recession isn’t evident in recent data, although those figures are lagging indicators and could be subject to revision. Often it’s not clear that a recession has begun until afterwards.
Economic Uncertainty Is Elevated
Economic fear and uncertainty are high. The Economic Policy Uncertainty Index has risen to levels not seen since the pandemic. That index, constructed by academics, reflects newspaper reports about government policy, expiring tax code provisions and dispersion of economic forecasts. It doesn’t mean a recession is necessarily coming, but suggests that the path for the U.S. economy is unclear. That’s unsurprising given how tariff policies are changing week to week.
Diverging Growth Forecasts
The Atlanta Federal Reserve’s GDP Now model is calling for negative growth in Q1. However, that may be mostly due to a spike in non-monetary gold imports. If adjustment is made for that, Q1 GDP may be close to zero according to the GDPNow model, rather than negative. Even with the adjustment, this would still represent a significant slowdown in growth. In contrast, the New York Fed’s Nowcast model suggests Q1 growth of around 2%, similar to Q4 levels. Of course, both these models update as more economic data comes in.
Falling Confidence
The main concern is that consumer and business confidence is falling. For example, Federal Reserve Chair Jerome Powell, noted that “recent surveys of households and businesses point to heightened uncertainty about the economic outlook. It remains to be seen how these developments might affect future spending and investment. Sentiment readings have not been a good predictor of consumption growth in recent years.” As such, historically these readings have not be as informative as firmer economic data.
A Declining Stock Market
There has been an almost 10% decline in the S&P 500 since mid-February. That’s not an extreme decline, but it returns the index to levels of last September. Declines of this magnitude are fairly common, occurring roughly every 2 years making them more common than recessions. For example, a larger stock market decline of over 20% from January to October 2022, that stock market slump did not result in a recession.
Still the market can be accurate, too. The sharp market decline in early 2020 was an accurate indicator of the pandemic recession.
The current fall in the market shows economic risk is elevated, but a recession is not guaranteed. The market is also trading at historically elevated valuation levels, so falling prices could represent changing attitudes to risk and valuation, rather than declining economic growth.
What To Expect
Recession risk is currently elevated, but a recession is not certain. For example, prediction market Kalshi currently puts the chance of a recession in 2025 at 40%. That’s higher than average, but still doesn’t suggest a recession will occur.
Historic data, for Q4 and into February 2025 is, so far, reasonably positive, but could be subject to revision. Forward looking data suggests very high uncertainty. Clearly, there is a path for the U.S. to see a recession in 2025, especially with the possible impact of tariffs in disrupting economic activity. However, much will depend on economic reports for March and April in showing whether the fears of businesses and consumers become reality, or if recession risks are currently exaggerated.
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