Washington
CNN
—
Bad news about the US economy travels fast, but examples of a slowing economy are potentially being blown out proportion.
Consumer spending declined in January for the first time in nearly two years, a real-time forecast of economic growth recently turned negative, the housing market was off to a sluggish start this year and the air is rife with uncertainty because of President Donald Trump’s frenetic back-and-forth on tariffs.
The Conference Board’s latest consumer survey even showed that the share of respondents expecting a recession in the coming year jumped in February to a nine-month high.
But data for the beginning of the year was skewed by temporary forces, such as unusually harsh weather and wildfires. The underlying fundamentals remain solid: Employers continue to add jobs at a healthy pace, unemployment has stayed low and wages are still outpacing inflation.
And it’s true that Americans are feeling uneasy because of Trump’s tariffs, but sentiment is not great at predicting future spending behavior.
One cause for concern, though: The Fed still isn’t done bringing inflation to target, and the threat of a global trade war sparked by the Trump administration could jack up consumer prices further.
”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 CNN. “Inflation is still a top priority.”
In January, large swaths of the United States were buffeted by severe winter storms; over in southern California, deadly wildfires ravaged neighborhoods.
Those events likely curbed economic activity that month, economists say: Consumer spending fell 0.2%, according to government data, as home construction plunged 9.8%. That triggered a real-time forecast of economic growth by the Federal Reserve Bank of Atlanta to show the economy contracting a sharp 2.4% in the current quarter. (The numbers will almost certainly change in the government’s official estimate of gross domestic product for the first quarter, due in April.)
“We’ve only gotten data for early in quarter, and that GDP tracker adds in new data as we go along,” so the numbers can be affected by a big drop, said Blake Gwinn, head of US rate strategy at RBC Capital Markets. “It’s only going to even out.”
St. Louis Fed President Alberto Musalem said in a speech Monday that rough weather was likely the culprit behind shoppers pulling back earlier this year, which is why he still thinks 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 US economy added 151,000 jobs last month, the Labor Department said Friday, as average hourly earnings continued to rise faster than inflation. Unemployment edged higher in February but remained relatively low.
But what about the economic jitters?
Fed Chair Jerome Powell said Friday he’s not too worried for one reason: “Sentiment readings have not been a good predictor of consumption growth in recent years.”
Several Federal Reserve officials have recently noted economic uncertainty and signs of slower growth. But none of them mentioned recession worries.
Rather, some of them pointed to the risk of inflation picking back up again, if the tariff spat among the United States and its three biggest trading partners spirals out of control. Trump has imposed additional levies on Chinese imports and has applied — and then suspended — tax hikes on Canadian and Mexican imports. Retaliation and tough rhetoric has escalated trade tensions among the countries — a rapid-fire back-and-forth that’s given consumers and businesses whiplash.
“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 an event hosted by Bloomberg.
Philadelphia Fed President Patrick Harker said Thursday at an event in Philadelphia that price “pressures are building” and that the progress the Fed has seen so far in taming inflation is “at risk.”
The Fed stopped cutting interest rates in January precisely because there was little progress on the inflation front in the final months of 2024. The tide hasn’t turned enough for the Fed to consider lowering borrowing costs again anytime soon, with Wall Street betting that the Fed will hold rates steady again later this month, according to futures.
“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, said in commentary issued Friday.
