Through Thursday (March 27th), it appeared that the equity markets had shaken off much of their recession anxiety with the major averages showing modest growth for the week. That all changed on Friday:
- The University of Michigan’s Expectations reading in its Consumer Confidence Survey for March was at or below levels of the past eleven Recessions with auto, home, appliance and vacation spending indications at or near historical lows. Worse, long-term inflation expectations rose to a 3.9% annual rate. That’s a 32 year high – last seen in 1993! 1 6
- The tariff file continues to unsettle. As the April 2nd tariff date approaches, other countries are considering retaliation. Canada has been vocal about it, with the prime minister now encouraging Canadians not to vacation in the U.S. (In a trade war, no one wins!) 23
As a result, all the equity markets could think about was “stagflation” and they tanked on Friday with the DJIA down -710 points (-1.7%) and the other major indexes off -2% or more.2 4 The table shows the changes in the major equity indexes for the past week and two-week periods, and for 2025 year to date. Note that for 2025, the tech heavy Nasdaq and small cap Russell 2000 indexes are down at the -10% level for the year with the S&P 500 showing up with a -5% handle. 4 11 The DJIA is the best performer YTD with a loss of only -2.26%.
The Magnificent 7, all the rage in 2024, are down an average of -24% from their recent peaks and -15% so far this year, with only Meta near its 12/31/24 closing price.4
So, it isn’t any wonder that the equity markets have retreated. The most recent economic data confirm that the economy is slowing with Q1 GDP growth now forecast at -2.8% by the closely watched Atlanta Fed’s GDPNow model.4 5 Does this mean Recession? Not yet, although the probability of one has risen. The rule of thumb for a Recession is two sequential negative GDP quarters. Q4/’24 was +2.4%. Much of the Q1 negative estimate came from the huge trade deficit data which resulted from the private sector stocking up inventories prior to tariff effective dates. Such a scenario is unlikely to be repeated in Q2. Nonetheless, there is a non-trivial chance that Q2’s GDP growth also shows up with a negative sign, thus triggering the rule of thumb definition of “Recession.” Officially, Recessions are dated by the National Bureau of Economic Research (NBER). The dating process often takes up to a year after the Recession actually begins. As a result, the business community uses the two negative quarter rule of thumb.
Weakness ahead has shown up in consumer and business confidence surveys, but not yet in the hard data. We expect it will soon. The Conference Board’s Consumer Confidence Index fell in March for the fourth month in a row, and the key “Expectations” sub-index fell to the lowest level (65.2) since March 2013, i.e., 12 years ago.1 6 As noted in the release notes, that Expectations reading was “well below the threshold of 80 that usually signals a recession ahead.” According to Economist David Rosenberg: “Expectations over better ‘business conditions’ are down to an eight-month low, job market expectations are down to a seven-month low, and income expectations are down to a nine-month low. Auto, home, appliance and vacation spending intentions are at, or near, the historical lows.”6 7 So far, retail sales in 2025 have been lackluster.
In addition, in March, the Philly Fed’s Services Index fell to levels last seen during the pandemic. At -32.5, it has been negative for five months in a row. 6 Fully 64% of survey respondents said that “uncertainty” was the single most constraining factor,11 also seen in comments at Q1 meetings of publicly traded companies. To wit:
- Fed-Ex: Sees “weakness and uncertainty in the U.S. industrial economy;”
- Nike: Indicated that tariffs were a key part of falling consumer confidence;
- Lenar: “…persistently high interest rates and inflation” combined with lower consumer confidence, have “made it increasingly difficult for consumers to access home ownership.”
- General Mills: Sees organic sales down -1.5% to -2.0% this fiscal year. (Note: Cutting back on cereal and snacks implies that consumers are tightening their purse strings.)
So far, Recession indicators have been confined to the survey data reflecting confidence or expectations. These are normally leading indicators. And, if they persist, the outcome is normally lower spending by consumers and a pullback on capex spending by businesses.
For sure, the tariff file has caused foreigners to rethink travel to the U.S. Already there is a widespread movement in Canada to not vacation in the U.S. with forecasts for inbound travel to the U.S. being cut by the firm Tourism Economics to -5.1% from +9.0% for 2025. According to Rosenberg Research, tourist operators have already reported a -5% decline in bookings.
Stagflation
Perhaps the primary reason for the loss of confidence in the equity markets is the upward spike in inflation expectations. This was noted in all the recent surveys. The right-hand side of the graph below shows the spike observed by the Conference Board.
Not only is confidence down and inflation expectations up, but the labor market appears to be softening. We don’t see it yet in the official U3 unemployment rate (4.1%), as the large number of layoff announcements have not yet impacted the hard data (but they will). (We note that the U6 unemployment rate spiked from 7.5% in January to 8.0% in February, a significant move that should sound alarm bells.).910Note from the graph that respondents to the Conference Board’s Survey believe that the jobs market will tighten considerably going forward.
This, combined with the negative GDP forecast from the Atlanta Fed stirs fears that 1970s 5 4 style “stagflation” has returned. While there are lots of reasons that it hasn’t (for one, there isn’t a wage-price spiral), just the thought sends investors into hiding. Thus, the concern in the financial markets.
The economy has been held up by consumer spending. In this cycle, it has been the wealthier cohorts that have carried the economy. A downturn in equity prices impacts these consumers most. Already, lower and middle-income households have been trading down to make their incomes go further. So, via the “wealth effect,” lower equity prices are likely to have a similar impact on the higher income earners.
In addition, consumers are falling behind on their bills. Both auto loan delinquencies and credit card delinquencies have spiked, both precursors to slowing consumption.
The Fed
The Fed stood pat on interest rates at its March 18-19 conclave (Fed Funds remain at 4.25%-4.50%), no doubt worried about rising inflation expectations.8 10 The media’s unrelenting coverage of the tariff file likely played a major role. Likely this will persist in April as the tariffs get implemented, and we are going to see a short-lived spike in inflation as a result. Sometime, likely this year, the impact of tariffs on inflation will pass. But this does mean that the Fed will stay higher for longer. We note that the Fed did a back-door ease by lowering the rate of its Treasury portfolio sales from $25 billion/month to $5 billion. That’s significant and is likely to lower the Treasury yield curve in the near future. (Good for bonds) 9 10 Nonetheless, it appears that the horizon for lower rates has been moved back a few months.
Final Thoughts
The equity market has reacted negatively to the fall in consumer confidence and especially to the spike in inflation expectations which, in turn, appears to have been heavily influenced by the media and its perceptions of a tariff induced price spiral. 4 5 The result has been a steady erosion in the major equity indexes, particularly the Nasdaq and small-cap Russell 2000. All seven of the Magnificent 7 are down year to date, with six of those seven down double digits.
The survey data imply a pending Recession. Spending intentions for autos, homes, appliances and vacations are at or near historic lows, and retail sales have become lackluster.7 10 So far, the hard data haven’t reflected such weakness. However, according to the Atlanta Fed, GDP for Q1 will show up as -2.8%. A continuation of such weakness, the likely scenario, will put the economy into a technical Recession (two quarters in a row of negative GDP growth).7 6 The NBER will get around to dating the Recession maybe by year’s end or sometime in 2026.
One thing is for sure, as the Recession unfolds, the Fed will have to lower interest rates. It appears from the data trends that the two rate cuts implied by the Fed’s dot-plot and currently priced-into markets will be insufficient, as it is likely that the Fed will have to get at least to a neutral stance (3.0% by their standards) by year’s end if not sooner.8 10
(Joshua Barone and Eugene Hoover contributed to this blog.)