NRF: Recession Possible, But U.S. Economy Solid For Now
Concerns over several economic issues, including tariffs leading to higher prices and the possibility of slower job growth, are creating a great deal of uncertainty among consumers, according to a new report from the National Retail Federation.
Jack Kleinhenz, chief economist at the NRF, said the possibility of a recession in the U.S. has increased due to rising trade tensions and other economic factors.
“A set of Federal Reserve indexes that measure state-level economic data showed increases in 43 states and decreases in only three as of April — rather than the negative growth in at least half of the states that would be considered an indicator of recession-like conditions,” he said. “The wide range of uncertainty (in the U.S. economy) has introduced a high level of unpredictability in the U.S. economy and has raised the probability of a significantly slower pace of growth.”
Kleinhenz’s comments came in the May edition of NRF’s Monthly Economic Review, which said the economy is “at a pivot point” after ending 2024 with 2.8% year-over-year gross domestic product (GDP) growth and falling inflation.
In the first quarter, U.S. GDP contracted at an annualized rate of 0.3%, ending 11 consecutive quarters of growth and expansion in 36 of the past 40 quarters.
Kleinhenz said the GDP’s contraction in the first quarter has heightened fears of a recession but noted that the data is not yet consistent with a typical downturn. Instead, the topline GDP figures overstate the weakness in the economy and are largely the result of a surge in imports during the first quarter, as consumers and businesses sought to get ahead of tariffs announced in April.
In contrast, overall personal spending growth in Q1 was up 1.8% year-over-year. Private final sales to domestic purchasers — a measurement that focuses on consumer and business spending — were up 3.1%, following a 2.2% gain in the prior quarter, suggesting a relatively steady pace of growth. Driven in part by pre-tariff purchasing, consumer spending on goods was up 4.1% in March compared to a year earlier, while spending on services rose an impressive 6.3%.
The labor market is also performing better than expected following the announcement of tariffs. Employers added 177,000 jobs in April, and the unemployment rate remained unchanged at 4.2%. Disposable personal income (income after taxes) was up 4% year-over-year in March.
On the inflation front, the Personal Consumption Expenditures (PCE) Price Index, the key indicator used by the Federal Reserve, showed prices were up 2.3% year-over-year in March. The Employment Cost Index, which measures wages, salaries, and other employment costs, was up 3.6% year-over-year in the first quarter. While this exceeded inflation, it marked the slowest growth in four years.
“Well-established economic theory is very clear that tariffs raise prices for consumers, distort investment, and reduce the competitiveness of firms that use non-U.S. parts, materials, and other inputs,” Kleinhenz said. “I remain concerned that the sporadic implementation of tariffs—announced one day, postponed the next, and maybe (or maybe not) finally imposed later—is weighing on business investment and hiring. This is likely leading to a weaker labor market, which will be harmful. People are on an economic cusp, and when they worry about their jobs, their anxiety often triggers a slowdown in consumer spending.”
