Could the US be heading for recession?

Donald Trump has refused to rule out an American recession. He “hates to predict things like this,” he said yesterday. When asked if a downturn was coming this year, the President responded that a “period of transition” was on the cards.

On Thursday last week the Atlanta Fed’s GDP “nowcast” model was forecasting that America’s economy would shrink by 2.4 percent in the first quarter of this year — a slight improvement on the 2.8 percent contraction it had predicted three days earlier. If this reading for the first three months of 2025 proves to be true, and things don’t pick up shortly, could the USA be heading for recession?

Analysts began to get particularly fearful about the health of the American economy two weekends ago when President Trump confirmed 25 percent tariffs on Mexico and Canada, followed by an additional 10 percent on China (which already faced levies of 10 percent on all goods). Within minutes markets were down — and a “Dow Tracker” on Fox News showed the stocks fall in real time as the President spoke. Within days many goods were exempted as the tariffed countries retaliated.

At the same time as Trump was making his final tariff threats, the US Census Bureau was releasing figures that showed US goods imports up 12 percent while exports only rose by 2 percent — a substantial trade deficit that weighed on GDP, according to the Atlanta Fed’s model. Writer Matthew Klein says that putting too much emphasis on the effect of imports leads to inaccuracies in the Fed’s model, while Pat Higgins, who created the Atlanta Fed model, said that if it had been adjusted for an increase in gold imports (there has been stockpiling because of tariff fears) then the model would have GDP stagnant at 0.4 percent growth. 

But regardless of any effect — for good or ill — the tariff policies Trumponomics has on trade, domestic prices and consumption, there have been indicators that predate inauguration day suggesting the US economy is significantly weaker than it has seemed since the world emerged from the Covid pandemic and America raced ahead.

On Friday, Jerome Powell, the chair of the Federal Reserve, warned that Americans were likely to spend less this year, saying businesses were concerned about "heightened uncertainty about the economic outlook." He suggested that the central bank will be wary about continued cuts to interest rates.

The issue really driving recession fears is negative sentiment around consumer spending. The consumer economy is a vital part of America’s economy because it accounts for nearly 70 percent of US GDP. Last month consumer confidence — essentially a measure of how John and Jane Doe feel the economy and their own finances are going — fell at the fastest pace in nearly four years. The Conference Board’s confidence index dropped 7 points — a much sharper drop than a poll of economists by Reuters had predicted. It was also the third monthly decrease in the index in a row.

Meanwhile, consumer expectations of inflation are that prices will rise by 6 percent over the next year, up from 5.2 percent last month. Most of these surveys were carried out and predictions made before Trump’s tariffs were enacted, so the worst could be yet to come.

And what of markets? As Hamish McRae reported on Coffee House last week the NASDAQ Composite index had reached "correction" levels (meaning a 10 percent fall from market peak). Of the "magnificent seven" tech companies, only Mark Zuckerberg’s Meta, the owner of Facebook and Instagram, is up since the start of the year. While stock indexes in Mexico, Europe and Canada are up or flat, America’s S&P is down nearly 2 percent since January. 

But as Powell pointed out in his Friday comments, the issue is not of negative economic indicators across the board but rather the uncertainty — which markets and pundits struggle to interpret —  inherent with a Trump White House. Jobs continue to grow and have risen by 191,000 every single month since September, on average, and longer term expectations of inflation remain on course for the 2 percent "goal." The challenge then, for economic policy makers and market speculators alike, is to sift the uncertainty from the noise. Failure to do so and make overly confident predictions about where America’s economy is going under Trump — as the Atlanta Fed has done — would be brave if not foolhardy.