Is a recession looming? That’s the question on the minds of many Americans. To find out, let’s turn to Federal Reserve Chairman, Jerome Powell.
The Federal Reserve Chair, Jerome Powell, spoke to the nation yesterday to announce that the Federal Open Market Committee (FOMC) decided not to change its benchmark federal funds rate, leaving it at 4.25% to 4.50%. Powell also provided a detailed assessment of the condition of the U.S. economy, including tariffs, employment, inflation, and other relevant factors. Many Americans have been wondering if the U.S. is headed for a recession? Let’s examine this issue.
Condition of U.S. Economy
Powell said the U.S. economy is strong overall and labor market conditions are solid. He added that the economy grew at a rate of 2.3% during the fourth quarter of 2024. He also said consumer spending is moderating following rapid growth in the second half of 2024. This is important since consumer spending is by far the largest component of the U.S. economy, accounting for approximately 70% of total GDP. Thus, if consumers continue to spend, the economy should do well.
Why is consumer spending moderating? Powell mentioned there is heightened uncertainty over the economic outlook and it remains to be seen how this may affect future spending and investment. In other words, it’s nearly impossible to accurately forecast how the economy will do in the near term, given the level of uncertainty that exists. The median GDP projection, he stated, for 2025 is about 1.7%, which is lower than what was projected this past December.
Labor Conditions
Powell said the labor market remains solid with job gains averaging 200,000 per month for the past three months. Unemployment is low, at 4.1%, and wages are growing faster than inflation. Powell also said the labor market is not a source of significant inflationary pressures.
Inflation Report
The latest CPI report shows inflation fell to 2.8% in February, down considerably from its peak of 9.1% in June 2022. In the final year of the Biden administration, inflation ranged from a high of 3.5% in March to a low of 2.4% in September. The February inflation report reveals that food prices rose by 2.6%, less than the overall rate, while energy prices fell by -0.2% for the previous 12 months ending in February. Even though inflation has fallen, it is still above the Feds target rate of 2.0%.
The Trump Administration Policies
Powell also said that the new administration is in the process of implementing significant policy changes in four distinct areas: trade; immigration; fiscal policy; and regulation. According to Powell, it is the net effect of these policy changes that will matter for the economy and for the path of monetary policy (i.e. interest rates, money supply, bank reserve requirements).
Tariffs, according to Powell, may not be as inflationary as some expect. Why? From manufacturing to the end consumer, there are many stops. It’s possible that the added cost of tariffs may be partly absorbed by the manufacturer, distributor, and retail outlets, leaving less for the consumer to pay. Also, if tariffs are short lived, existing inventories may be enough to bridge the gap. However, there is too much uncertainty to know for sure.
Interest Rates
The Federal Reserve has control over short-term interest rates. Yesterday, the FOMC left the federal funds rate at 4.25% to 4.50%. Powell said he expects this will fall to 3.9% by the end of 2025 and to 3.4% by the end of 2026. In other words, Powell is signaling a few rate cuts between now and the end of next year.
Is Recession Coming?
Again, Powell did say there’s a lot of uncertainty around the Trump administration policy changes and their effect on the economic outlook. However, given the most recent data, there is no sign that a recession is near. Not yet anyway. In recent years, unemployment has tended to rise as we enter a recession. Following a peak of 14.7% in April 2020, the rate of unemployment fell to a low of 3.4% in April 2023. In July, August, and November of last year, the rate reached 4.2%. Again, unemployment is currently at 4.1%.
According to Jeremy Piger, Professor of Economics at the University of Oregon, there was a 0.3% chance that the U.S. was in recession in January. Piger has conducted extensive research on the subject.
For perspective, the primary authority on the business cycle, which includes recessions is the National Bureau of Economic Research (NBER). The business cycle reveals when the economy reaches a peak, when it contracts, and when it begins to grow again. The NBER is the source most cited to determine these inflection points. The NBER makes this determination months after the fact. In other words, there is no reliable source to declare a recession in real time. Perhaps A.I. will change that. Even so, many economists expect the U.S. economy will contract in the first quarter of 2025.
While the academic definition of a recession is two calendar quarters of negative growth, the other method often used – albeit less precise, is a prolonged period of economic weakness. It’s clear that the U.S. economy has not met either definition.
Even though there is a chance of recession in the not-too-distant future, today, the economy is strong, the labor market is solid, and inflation is falling. Although the chance of recession exists, it seems to be low. As Powell said, the four distinct policy changes underway in the Trump administration adds a great deal of uncertainty and we will need to keep a close eye on any recession indicators. Stay tuned.
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