Companies and consumers have shown so much anxiety over the future of their businesses and pocketbooks over the past two months that economists are lowering their projections for growth and starting to boost their likelihood of a recession.
A significant slowing down in growth in the next several months looks imminent as President Donald Trump fuels economic uncertainty by imposing broad tariffs. Whether there is a recession—a time when the economy essentially collapses down a cliff—remains a topic of contention.
“Soft” data—that is, surveys asking questions and analyzing responses—have not yet turned into “hard data,” cold facts like job growth, retail sales, and consumer expenditure. Two months into President Donald Trump’s second-term, the hard data is holding up nicely.
Although soft data does not always indicate a recession, in an interview Mark Zandi, chief economist of Moody’s Analytics, argued that it is a necessary condition for the hard data to go southward.
“You never go from everyone’s feeling great to a recession,” Zandi remarked in an interview. You move from where everyone’s feeling fantastic to where they are not so well to recession.”
Forecasting a recession makes Wall Street analysts reluctant. At EY Parthenon, Gregory Daco, chief economist, estimates a 40% recession probability. Normal times have seen the likelihood of a recession as roughly 15%.
Notable independent economists are becoming concerned in public about the situation. Former Fed Vice Chairman Alan Blinder remarked in a Wednesday CNBC interview “If I had to make a bet, it would be a recession.” “Not a titantic one, but negative GDP growth is more likely than not.”
False alarms regarding recessions have been triggered since 2022; many analysts believe a recession is unavoidable as the U.S. central bank had to fast hike interest rates to lower inflation. Still, the projected slump never materialized. This has resulted in this part of the boy who cried wolf regarding a recession.
A recession can be best understood as a downward spiral of growth that can become independent of human will. Usually brought on by financial stress or a shock, consuming and companies pull back. Companies begin to let go of employees in response to declining revenues, which might aggravate already existing economic problems. For economists, a recession marks a dramatic departure from conventional models emphasizing trends. This is the reason they are so difficult to forecast. Economists find it difficult to explain when the models they rely on fail out of the blue.
One cannot adequately emphasize the harm caused by recessions. Workers suddenly lose their employment and money for no fault of their own. To try to stabilize the economy, the government increases expenditure by creating additional debt; meanwhile, the U.S. social safety net is strained.
Generally speaking, a recession is two consecutive quarters of GDP decline. Not always, though, is the case. Examining many indicators of economic activity, the nonprofit National Bureau of Economic Research formally determines whether the United States has entered a recession.
Trump levies taxes.
Could a recession really strike this time? Here is what we currently know.
Right now, experts say, the most amazing aspect of the economy is how uncertainty has enveloped it like a fog. From the noise, a signal indicating a trend is difficult to discern. Federal Reserve Chairman Jerome Powell summed up the attitude at his press conference last week as “I just think uncertainty is remarkably high.”
Consequently, the fleet of Ph.D. economists working for the U.S. central bank finds it difficult to envision the way ahead. First of all, it’s not certain what President Trump’s tariff scenario will resemble in six months. Republicans are also playing chicken with the debt ceiling, therefore casting doubt on Wall Street.
Investors are also flocking to purchase gold and bitcoin at the same time, therefore devoting limited private money away from wise investments. Furthermore, the Fed has indicated it is on pause until the fog clears and won’t change monetary policy to save the economy.
“All of this sums to an economy that has resilience but is listing over in the first quarter,” Boston College economist Brian Bethune remarked. “The more it listings under uncertainty, the more likely a rogue wave comes along, capsizing the ship into recession,” he said.
The change in confidence during the past few months is rather remarkable.
“I have been at the Fed for ten years and this is the most dramatic change in confidence that I can recall except from when COVID struck in March 2020,” Minneapolis Fed President Neel Kashkari said in a speech in rural Michigan on Wednesday.
This declining confidence among American consumers and corporate leaders has increased the possibility that companies and customers may simultaneously draw back. This would drastically slow down the economy if everyone stops investing in new manufacturing and spending, he said.
The good news, Kashkari noted, is that if trade uncertainty is satisfactorially addressed, trust might be rebuilt fast. Kashkari cautioned, though, “the longer this weak confidence lasts, the more meaningful it becomes.”
Economists already spot certain consumer warning signals. Chief economist Mike Feroli of JP Morgan Chase (JPM) noted in a recent research note that restaurant sales had just suffered their worst three months in three years, including a sizable 1.5% decline in February.
“Given the discretionary character of eating out, it’s plausible that this is one early indication of households tightening their belts, Feroli wrote.”
DOGE as well as Elon Musk
The worries about the direction go beyond merely tariffs. Job uncertainty jumped in the March consumer confidence data. And consumer hope for future income basically disappeared.
What drives the depressing expectations?
Economists said that the broad reductions Elon Musk’s DOGE is making to the federal staff could be chilling private-sector workers all around, providing even another incentive for saving rather than consumption.
“It may be reminding people of the tenuous nature of their own jobs,” remarked Zandi.
“Workers are bound to ask themselves, ‘if this is what Elon Musk, the best business person on the planet, does and this is deemed to be good business practice, what does it mean for my job’?” Zandi spoke.
Gross domestic GDP is seventy percent composed of consumer expenditure. Global chief of research at Barclays Ajay Rajadhyaksha remarked that the low consumer savings rate is the “Achilles heel” for the US economy.
From 7% pre-pandemic, the savings rate has been “extraordishly low,” in the range of roughly 4% since COVID, as consumers have used excess savings to spent money on experiences.
“DOGE job cutbacks, policy uncertainty, genuinely increasing tariffs, and equities markets pulling down are now a regular rhythm. Assuming the savings rate rises is not insane,” he remarked.
He pointed out that a full percentage point or higher increase in the savings rate would mean 100 basis points deducted from consumption and GDP growth.
Rajadhyaksha claimed his baseline call was not a recession. From 2.5% rate last year, he indicated there would be a sharp slowing down this year to a 0.7% growth rate on a fourth-quarter over fourth-quarter basis.
When analysts discuss growth below 1%, all it takes is a strong breeze to send the economy into a ditch.
‘peak pessimism’
Chief U.S. economist at Jefferies Thomas Simons believes that recession worries are exaggerated. Simons remarked, in an interview, “I generally don’t buy the whole recession story.”
Though low-income workers have problems, he noted overall household balance sheets are in a very good posture.
“There is nowhere nearly the vulnerability that would cause a spiraling situation of deflation of assets and money supply and wealth destruction that we saw in 2008,” he said.
Although he acknowledges the economy will be slow until June, he does not believe the circumstances are ready for a catastrophic full-fledged recession.
Simons claimed that our current “peak pessimism” regarding Trump’s economic ideas would fade over next months.
“The economy overall, in my view, is on a pace with enough momentum to withstand a little bit of a pullback in expenditure,” he remarked.
First quarter economic growth will be somewhat meager, and in the April–June quarter it will be just somewhat better. The economy will recover, though, to show improved second half of year growth.
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Former JPMorgan Chase economist Jim Glassman concurs with Simons on structural soundness of the economy. He pointed out that the government revealed Thursday that U.S. headquarters operations’ worldwide earnings grew 25.6% in the fourth quarter of last year and 6.8% throughout the whole year.
“Beyond the frenzy over uncertainty, there are solid business basics,” Glassman emailed.
