A recession is coming in the US (and what are the criteria for a recession in the first place)?
The current economic situation: worry or already pessimism?
The S&P 500 has lost about 4% in the less than three months of this year, and in the last month alone it was 8.6% below its peak. It also worries that it has recorded losses for four weeks in a row, the analysis was noted by the New York Times, adding that the slowdown in economic activity was also indicated by other indicators. Business and consumer confidence in the US economy is declining. Expectations of future interest rate movements have waned — until a few weeks ago, investors expected the first cut back in June, now those expectations are moving towards July.
Current data suggests that the US economy could shrink by 1.8% in the first quarter of 2025. Such an assessment, however, is already lighting the warning lights and raising concerns that the US economy is already moving towards recession.
What (not) does the Fed say?
The Fed kept interest rates unchanged at its last meeting, while warning of heightened uncertainty about future economic growth. Despite the expected easing of inflation, he remains cautious about possible measures. The forecast for economic growth for 2025 has been lowered from 2.1% to 1.7%, while inflation forecasts have been revised upwards to 2.7%.
The long-time Fed chairman, Jerome Powell, in his distinctive style (at Morning Brew they commented with a hint of irony that here, in fact, nothing is different than usual, as Powell is known for keeping the cards close to himself and reluctantly scattering with more concrete forecasts, even during periods of growth), warned that the central bank will wait and see before will take the next steps. The labor market remains relatively strong, giving the Fed more room for maneuver, but the question is how long this will last.
The Fed's latest statements and projections, however, reveal additional complexity and uncertainty. The combination of Trump's tariffs and spending cuts could simultaneously boost inflation and stifle growth, creating an extremely challenging situation for the central bank as well, according to the NYT. Economists warn that the Fed could soon find itself in a serious dilemma: defend stable prices or support economic growth -- both may no longer be able to simultaneously.
The role of trade policies and customs
President Trump's administration, or, if you will, Donald Trump personally, insists that the current economic turmoil is part of a transition period on the way to a bright future and that the benefits will be long-term. Tariffs on Chinese, European and other products are expected to boost domestic production in the United States and create new jobs.
While Trump and his advisers advocate a strategy of short-term dips and pains in exchange for long-term benefits, many economists warn that the wrong trade policy can lead to longer-term damage.
Critics of Trump's economic policies warn that his scenario is very optimistic. Higher prices for imported goods are more likely to have a negative impact on consumers and lead to additional inflationary pressures, they warn. An additional problem is the fall in the value of the US dollar, which lost 4% in March, which means that imported goods are becoming even more expensive without customs duties.
When are we officially talking about a recession?
A recession is usually determined based on several indicators, with the US game playing a key role in its official declaration by the NBER, the US National Bureau of Economic Research. (Before you ask: The NBER is an independent, private nonprofit research organization that's not part of the U.S. government, so Trump has no direct influence over it, at least officially, and DOGE and Elon Musk also can't quite fire its employees.)
Key criteria include two consecutive quarters of negative GDP growth, falling industrial output, rising unemployment, falling real household income and falling retail and wholesale sales volumes.
What does this mean for investors?
The current uncertainty requires investors in the US market to exercise caution and an even more thoughtful strategy. If the recessionary trend continues, the Fed may be forced to lower interest rates earlier and more aggressively, which could have a positive impact on bond investments and certain equity segments, particularly stable dividend stocks.
However, let's reiterate: there is an increasing risk that the Fed will have to juggle between conflicting goals, that is, high inflation and declining growth. This may mean less room for classical countercyclical action. Investors should therefore pay particular attention to companies that are exposed to increased costs (imports, energy products, logistics) and at the same time rely on cheaper financing or a strong consumer market.
For long-term investors, a period of volatility can also always be an opportunity to buy undervalued stocks. Of course, under the urgent precondition that active monitoring of macroeconomic data and the Fed's strategy is key. Here's another assessment: it's pretty obvious that the rosy times in which central banks have been mass-rescuing markets are probably a thing of the past.
