Bad news about the U.S. economy spreads quickly, but concerns about an economic slowdown may be exaggerated.
Consumer spending declined in January for the first time in nearly two years, a real-time economic growth forecast recently turned negative, the housing market had a sluggish start to the year, and uncertainty looms due to President Donald Trump’s unpredictable stance on tariffs.
The Conference Board’s latest consumer survey indicated that the percentage of respondents anticipating a recession within the next year rose in February to a nine-month high.
However, early-year data was distorted by temporary factors, such as severe weather conditions and wildfires. Despite these disruptions, the economy’s core fundamentals remain strong: Employers continue hiring at a steady rate, unemployment remains low, and wages are still growing faster than inflation.
While Americans are uneasy about Trump’s tariffs, consumer sentiment alone is not a reliable predictor of future spending habits.
One notable concern remains: The Federal Reserve has not yet fully achieved its inflation target, and a potential global trade war, triggered by the Trump administration’s policies, could drive consumer prices even higher.
“Demand is showing some fraying around the edges, but it hasn’t accumulated to enough to be a meaningful risk of a downturn,” Vincent Reinhart, chief economist at BNY Investments, told. “Inflation is still a top priority.”
It’s Too Soon to Worry
In January, large portions of the United States were hit by severe winter storms, while deadly wildfires devastated neighborhoods in Southern California.
Economists believe these events likely hindered economic activity that month. Government data showed consumer spending fell 0.2%, while home construction plunged 9.8%.
As a result, the Federal Reserve Bank of Atlanta’s real-time economic growth forecast projected a sharp 2.4% contraction for the current quarter. (This estimate will almost certainly change when the government releases its official first-quarter GDP report in April.)
US Economy (Photo: Shutterstock)“We’ve only gotten data for early in the quarter, and that GDP tracker adds in new data as we go along,” explained Blake Gwinn, head of U.S. rate strategy at RBC Capital Markets. “It’s only going to even out.”
St. Louis Fed President Alberto Musalem stated in a speech Monday that adverse weather conditions likely caused the consumer pullback at the beginning of the year, reinforcing his belief that “the prospects for continued growth look good.”
“Part of my optimism about economic activity stems from the labor market, where conditions remain solid,” Musalem said.
The U.S. economy added 151,000 jobs last month, according to the Labor Department, with average hourly earnings continuing to outpace inflation. Although unemployment inched higher in February, it remained relatively low.
What About Economic Jitters?
Federal Reserve Chair Jerome Powell addressed concerns on Friday, stating he is not overly worried for a key reason: “Sentiment readings have not been a good predictor of consumption growth in recent years.”
The Fed Is Focused on Inflation, Not a Recession
Several Federal Reserve officials have acknowledged economic uncertainty and signs of slowing growth, but none have explicitly raised recession concerns.
Instead, they have pointed to the risk of inflation reaccelerating, particularly if trade tensions escalate. The Trump administration has imposed additional tariffs on Chinese imports while intermittently applying—and then suspending—levies on goods from Canada and Mexico. Retaliatory measures and tough rhetoric have heightened trade tensions, creating uncertainty for businesses and consumers alike.
“Based on what we know today, given all the uncertainties around that, I do factor in some effects of tariffs now on inflation, on prices, because I think we will see some of those effects later this year,” New York Fed President John Williams said Tuesday at a Bloomberg-hosted event.
Philadelphia Fed President Patrick Harker echoed these concerns on Thursday, stating at an event in Philadelphia that price “pressures are building” and that the Fed’s progress in controlling inflation remains “at risk.”
The Fed halted interest rate cuts in January due to limited progress in lowering inflation in late 2024. With inflation concerns still prominent, the central bank is not expected to reduce borrowing costs anytime soon. According to futures markets, Wall Street anticipates the Fed will keep rates steady again later this month.
“With inflation risks decidedly tilted to the upside and labor market conditions still generally solid, we believe a reactive Fed will maintain a wait-and-see approach over the coming months and expect only two Fed rate cuts in 2025, in June and December,” Lydia Boussour, senior economist at Ernst & Young, stated in a commentary issued Friday.
