Economic growth is ‘moderating.’ But data doesn’t show clear signs of a looming recession.
3 days ago
1 4 minutes read
The US economy has undergone a narrative shift over the past month.
After two years of outperforming expectations, it now appears the economy is growing slower than many on Wall Street thought it would to start 2025. But while the economy is cooling, it isn’t collapsing.
“Growth looks like it’s maybe moderating a bit, consumer spending moderating a bit, but still at a solid pace,” Federal Reserve Chair Jerome Powell said during his most recent press conference on March 19.
Powell’s description of an economy that “seems to be healthy” came after the Fed lowered its Gross Domestic Product (GDP) projection for 2025 to 1.7% in its latest Summary of Economic Projections (SEP) last week. This marked a move lower from the 2.1% growth the Fed had projected back in December.
Economic forecasters across Wall Street have made similar revisions to their full-year GDP projections based on expectations that President Trump’s tariff policies will weigh on business activity. JPMorgan now sees US economic growth of 1.6% this year, down from a prior forecast of 1.9%. Morgan Stanley is now at 1.5%, down from 1.9%, while Goldman Sachs projects growth of 1.7%, down from 2.4%.
Notably, none of these revisions have been calls for an outright economic downturn or some sort of rapid slowing in economic growth. For instance, in March, Goldman Sachs moved up its probability for a recession in the next 12 months to 20% from a prior projection of 15%. Given the chances of a recession in the next 12 months typically stand at about 15% at any given point in history, Goldman’s move to 20% isn’t exactly arguing that’s the most likely outcome.
“If you go back two months, people were saying that the likelihood of a recession was extremely low,” Powell said. “So, [it] has moved up, but it’s not high.”
Powell’s assessment of the US economic picture falls in line with what many forecasters have been saying, but it is more optimistic than other data points. Popular betting market Kalshi is now pricing in a 40% chance of recession in the next year, about double the chances that were projected in mid-February. The Atlanta Fed’s GDPNow tool recently made headlines, as it’s currently forecasting a nearly 2% decline in GDP for the first quarter. And several measures of consumer sentiment have tumbled in the past month as policy uncertainty has made consumers more wary about the economic outlook.
But most of those are indicative of vibes right now as fears of tariffs and federal layoffs make headlines. They don’t reflect the reality of the economy’s position.
It’s happened before: In 2022, consumer sentiment and confidence measures — both considered “soft” survey data — plunged in a similar fashion. Back then, consumers kept spending, keeping the “hard data,” like the monthly retail sales report, afloat.
In a research note to clients on Sunday, Morgan Stanley’s chief global economist wrote that “all the crises about recession” are “probably” overdone. He pointed to January’s decline in retail sales spooking investors, only to then be reversed by a gain in February.
The same could be said for S&P Global’s flash US composite PMI, which captures activity in both the services and manufacturing sectors. On Monday, the index reading came in at 53.5 for March, a rebound from the 51.6 seen in February and above economists’ expectations of 50.9.
S&P Global Market Intelligence chief business economist Chris Williamson wrote in a release Monday morning that his firm’s data shows the US economy likely grew at a 1.5% annualized pace during the first quarter of 2025. As Williamson highlighted, this points “to a slowing of GDP growth” compared to the 2.3% growth in the fourth quarter of 2024.
Again, this reflects weaker growth but not a catastrophic slowdown. In terms of impacts to the stock market, research from RBC Capital Markets’ Lori Calvasina shows that when GDP for the year is between 0.1% and 2%, the S&P 500 (^GSPC) struggles. Notably though, as the chart below shows, stocks do far worse when GDP is between 0.1% and 1%.
The key investor question right now is whether economic growth forecasts have come down far enough — or if they will keep moving lower and further weigh on stocks. For now, Deutsche Bank senior US economist Brett Ryan tells Yahoo Finance that the current signs of slowing aren’t abnormal.
For instance, consumer spending fell in January for the first time in nearly two years. But the loss came after several strong months of above-trend spending to end 2024. After growing at an “unsustainable pace” to end last year, Ryan said his team had already expected that metric to cool to start 2025.
“The question is, do we get more than that?” Ryan said. “And at this point, you know, we’re not there, given the labor market [is] still OK, and labor income growth is still enough to support consumption.”
Ryan pointed out that if labor market dynamics changed and the US economy started posting monthly job losses or the unemployment rate shot higher, then the outlook for consumer spending would also likely deteriorate.
But for now, metrics Ryan looks at — like the rolling average of workers continuing to apply for unemployment benefits — are “nowhere near what I would consider sending a recessionary signal.”
The American economy is showing signs of cooling, but data doesn’t indicate a recession is nearing, according to many economists. Mandatory Credit: Kirby Lee-Imagn Images ·IMAGN IMAGES via Reuters Connect / Reuters
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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