Fiduciary Corner / Recession Talk

Yesterday, the Bureau of Economic Analysis released its first GDP estimate for Q1, revealing a – 0.28% contraction. The report appears to blame the Trump Tariffs, citing a surge in imports as companies stockpiled ahead of the levies. But this narrative does more harm than good. First, this front-running of tariffs is a one-time effect, leaving doubt as to potential effects going forward. Second, the economic slowdown began well before the tariffs, the inauguration, or even the election. We’ve long cautioned that robust consumer spending has been masking broader economic weakness, leaving us vulnerable to shocks.

Are we heading for a recession? And how is a recession even defined? The government calls it subjective – not just two consecutive quarters of negative GDP growth. We say: call it what you will, it smells like a recession. Historically, recessions show a clear shift in consumer spending from “wants” (discretionary) to “needs” (nondiscretionary)—a pattern that often precedes official declarations. As the chart on the right shows, that shift is happening now.

There is a silver lining. Recessions typically result from excessive imbalances in the economy. This time, however, the weakness is already built-in (with the exception of a large, pre-emptive inventory build this quarter and credit card debt). As a result, any slowdown could be short-lived. Employment data is likely to be the most crucial factor for markets, providing insight into future consumer spending capacity and the potential for Fed rate cuts.