On the GDP data and the risk of a recession

For the most part what I suggested here, a month ago or so, seems to be essentially correct [the video is not very good, and it continued sharing the previous PowerPoint rather than mine]. What I said was that the objective or actual data on government spending, consumption and imports did not suggest a recession. I noted that the Atlanta Fed GDP Now prediction of a massive recession (2.8% of GDP) was probably incorrect and all predicated on the increase in imports, which were most likely an anticipation as a result of the announced tariffs, and that the economy would probably slowdown, as it was already slowing down, but that a recession was (at least immediately) unlikely. This is essentially what happened.

As I noted, these imports (say imported cars in a parking lot) are actually inventories, and more akin to investment. Jason Furman noted that if one looks at what he calls core GDP, then the economy grew at a more normal 2.4% in the first quarter. Note also, as I said in the above talk, that imports are pro-cyclical, and the rise in imports is NOT a sign of a recession.

Again, that does NOT mean that a recession should be ruled out. But the two mechanisms by which it would happen, if it does, should be properly understood. Uncertainty, per se, is not the central story. One channel as I noted in the presentation is the effect of possible higher rates (or simply no reductions) of interest on the housing market and from that on consumption. The Fed has been moved to a more hawkish stance, and even the possible new chairman, Kevin Warsh, seems even more hawkish. The other channel is in my view the big surprise of this report. Government spending fell, in particular a pronounced fall in defense spending. How much of that is caused by DOGE is unclear. The GDP tracker, when one looks at the monthly data, suggests a decrease, after February, even if overall spending since the beginning of the year is up when compared to 2024. But that seems to be the norm, and if they keep on track it should go up soon. Certainly no marked anomalous decline yet.

 

If the Trump administration takes a hawkish fiscal stance, then for sure we can expect a recession. I am somewhat skeptical that this is the case. Trump himself is not particularly concerned with fiscal issues beyond making his previous tax cut permanent. Republicans, except a tiny minority are not fiscal hawks. Actually, it is most likely to find fiscal hawks among Dems these days (and that is their problem; or one of them). But those would be the two channels that might cause a recession. To be seen.