Fears of a recession are greatly exaggerated. Sometimes, the market believes in ghosts.
The fears, however, are real. Last Friday, the Federal Reserve Bank of Atlanta lowered its GDPNow model of economic growth for the first quarter to a negative 1.5% annually. The Atlanta Fed’s forecast model stirred up talk of recession. One prominent economist said the economy is slowing at an alarming rate. But is it really falling into recession?
The Atlanta Fed’s forecast was slashed from an expansion rate of 2.3% to a negative 1.5% because the federal government reported a sharply higher trade deficit for January. The January trade deficit subtracted 3.7% annually from the GDP forecast. Excluding trade, the economy continues to grow at a healthy rate. Including the January trade data, the Federal Reserve Bank of St. Louis sees Q1 GDP growth of about 1.5%. Without the January trade data, both the Federal Reserve Bank of Dallas and the Federal Reserve Bank of New York project Q1 GDP growth above 2%.
Very importantly, on Monday, the Institute for Supply Management survey of February’s manufacturing activity said the United States economy continues to expand. The survey also found only a modest increase in imports. President Donald Trump’s threats to hit Mexico, Canada, China, and other trading partners with substantial new tariffs are causing importers to front-load shipments. Retailers and other companies across the U.S. are racing to import goods before any new tariffs take effect. But, it is hard to imagine that a rising trade deficit would cause the economy to sink into recession. After all, imports of goods and services account for only 16% of U.S. GDP.
Regardless of what Trump decides on tariffs, at some point, U.S. businesses will have sufficient inventory, and the pace of imports will slow. Carrying excess inventory hits profits. International trade does not drive the U.S. economy. Personal consumption drives the U.S. economy. Consumption accounts for about 69% of GDP. Consumer spending is growing at a healthy 2.5%. Households are enjoying real income gains.
Household income exceeds inflation. Through January, real, inflation-adjusted disposable income was expanding by about 2.4% on an annual basis. It is highly unlikely that U.S. households will dramatically slow consumption when they are enjoying high real gains in income, record personal wealth, and low debt service ratios.
Moreover, the corporate sector is strong. Earnings growth is outstanding, and balance sheets are in excellent shape. In this environment, widespread corporate layoffs are unlikely. Yes, recent data on consumer confidence has been soft, but it has been skewed by political polarization. Democrats are very negative about the economy; Republicans are very optimistic. Ultimately, whether consumers spend or not will depend on their income levels and inflation, not on their political sentiments.
This Friday, the Bureau of Labor Statistics will release data on February employment. Economists expect that the U.S. economy created about 160,000 new jobs over the last month. Economists also believe that hourly wage growth will show a healthy increase of around 0.3%, which on an annualized basis would show wage gains of around 4%, well above the inflation rate.
If these estimates are met, talk of a recession will evaporate. Of note: federal government layoffs caused by the Department of Government Efficiency will not push the economy into recession. One hundred sixty-three million Americans have jobs. At most, DOGE will reduce the labor force by a few hundred thousand, which is a little more than a rounding error.
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Yes, over the longer term, tariffs, lower immigration, and uncertainty caused by Trump’s policies will prove to be a drag on economic growth.
But over the next year, as long as the labor market remains resilient and healthy and households enjoy real income gains, the U.S. economy will almost certainly expand.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note on the markets, politics, and society. He can be reached at [email protected].