Recession? Maybe not.

Chris McKnight, CBS News

   By Guest Blogger Ryan Lewenza

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In my last post I focused on sequence risk, which is the risk to portfolios based on the order or ‘sequence’ of returns. I noted that sequence risk is more consequential for retired investors who are drawing from portfolios. Today, I’m going to stick with the topic of risk, specifically, whether the US economy is at risk of falling into recession. That’a more of an issue than ever, given teh Trump auto tariff shock of yesterday!

There’s been a sharp increase in chatter and concern around the prospect of a US recession, in part due to Trump’s chaotic approach and rollout of his tariff policies. For example, Google Trends has seen a 1,200% increase in searches for a ‘US recession’. This week Deutsche Bank released the results of a survey where 43% of the 400 people polled in the survey believe the US economy will experience a downturn/recession over the next 12 months.

When you combine this with precipitously declining US consumer confidence, and that the Atlanta Federal Reserve’s GDP model is predicting a 1.8% contraction in the first quarter, it’s no wonder then that concerns are rising of a US recession. As a reminder a recession is defined as two quarters of back-to-back negative growth, hence the rising concern if in fact the US economy contracts in the first quarter.

Fed’s GDP model is forecasting a contraction in Q1/25

Source: Federal Reserve of Atlanta

Personally, I think it’s premature to make this call and we continue to believe that the US economy will grow this year and see odds of a recession as quite low. Here’s why.

First, the most important driver of any economy are jobs, jobs, jobs, and right now the US is near full employment. The US economy has created over 28 million jobs since the last recession in 2020, which has driven down the unemployment rate to a near 50-year low of 4.1%. Initial jobless claims, which is the weekly tally of people going on unemployment benefits, remains near a 50-year low as well. We would likely need to see a big uptick in job losses and in the unemployment rate before a recession occurs, and that doesn’t appear to be in the cards for 2025.

US initial jobless claims are near a 50-year low

Source: Bloomberg, Turner Investments

Second, we’ve seen some weakness in what’s called ‘soft economic’ data like consumer confidence surveys, but we haven’t seen much weakness in the hard data such as employment data, retail sales and GDP figures. Yes, people are feeling less confident right now, in part due to the Trump chaos, but it hasn’t shown up yet in the hard data, which is what really matters. What people do is much more important than how people feel.

Third, the yield curve, which is the difference between short-term and long-term US bond yields, remains positive sloping, meaning short-term rates are lower than long-term rates. When the yield curve ‘inverts’ with long-term yields falling below short-term yields, this would be concerning as an inverted yield curve has always preceded a US recession. We’ll be monitoring the yield curve closely throughout the year and if it does end up ‘inverting’ then this could cause us some concern and likely increase the odds of US recession.

Speaking of odds of a US recession, another indicator we track for this is Bloomberg’s recession probability forecast model and currently it’s only at 25% as seen in the chart below. So, their model sees a 1 and 4 chance of a US recession in the coming year. This would need to climb above 50% before alarm bells start ringing.

Finally, economist expectations are for the US economy to grow 2.2% this year and we haven’t seen any real negative revisions to these expectations. Acknowledging that forecasting the future, especially with a mercurial US president, hell-bent on implementing inflationary tariffs, is difficult in the best of times, still, most economists see continued economic growth for the US throughout the year.

So, despite some weakness in the soft economic data and Trump’s potentially destabilizing tariffs, we believe recession risks remain low at present. If the facts change, then we could change our tune, but for now, we believe the concerns of a US recession are overblown and are sticking to our guns.

Bloomberg forecasting low odds of a US recession

Source: Bloomberg, Turner Investments

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/03/27/recession-maybe-not/