Summary
Over the past three and a half years, the US economy has defied the recession expectations of many, remaining uncommonly resilient in the face of major headwinds including Fed tightening, an oil price spike, and most recently Trump’s Tariff policies. A big reason for the economy’s impressive resilience is that the labor market has remained very resilient. Americans are working, secure in their prospects to keep working, so their spending hasn’t been slowed by tariff-related uncertainties.
Trump Tarrif Headwinds
Trump’s Tariff headwinds certainly caused lots of uncertainty for workers and their employers, particularly during April and May. It was widely expected that consumers might cut back their spending because of the uncertainty, especially if businesses responded to Trump’s tariffs by reducing their payrolls. So far, the evidence shows that consumers are still spending, and businesses are still expanding their payrolls.
The most widely anticipated recession of all times remains illusive. It didn’t show up over the past three years when the Fed tightened monetary policy. It hasn’t happened so far this year as a result of tarrif related concerns. The economy continues to pass stress tests that in the past might have brought on a recession. So far, so good.
Recession Odds
The odds of a recession in 2025, according to Polymarkets.com, rose from around 20% during January and February of this year to over 60% during March and April. On Friday, the odds were back down to 27%. Not surprisingly, the S&P 500 has been inversely correlated with the Polymarkets.com recession series.
Exhibit 1: Recession Odds and S&P 500
In the past, recessions were usually caused by the tightening of monetary policy, not because of the effects of higher interest rates on demand but because the tightening triggered a financial crisis of sorts that quickly turned into an economywide credit crunch that caused a recession (demand crunch).
Over the past three years, we’ve often discussed this widely overlooked phenomenon called the “Credit Crisis Cycle.” Several of the recessions since the 1970s were either caused or exacerbated by commodity price spikes/ oil supply shocks that caused oil prices to soar.
Labor Market Remains Resilient.
The monthly employment report released by the Bureau of Labor Statistics (BLS) has lots of data about the labor market. Often, there’s enough to help economists who are either optimistic or pessimistic on the economic outlook to make their respective cases. We try to be objective: Instead of picking over the data for morsels that fit our narrative, we let the data tell us what’s what. We don’t do faith-based economics in our shop!
Friday’s report for May’s labor market indicators is an upbeat one, on balance. It confirms that the labor market remains resilient. So do lots of other recent labor market reports. There’s not much in the report to warm the cold hearts of the “diehard hard landers.” The much-feared Sahm Rule has yet to be triggered, as the unemployment rate remains at 4.2%. Let’s review the report:
The best news was that payroll employment increased 139,000 during May. That was much better than expected, especially after last Thursday’s ADP report showed a gain in private payrolls of only 37,000 for the month.
Exhibit 2: Nonfarm Payroll – BLS v ADP Data
In the BLS report, private payrolls rose 140,000 during May. The ADP releases haven’t been useful indicators of the same month’s BLS payroll changes for quite some time.
Continuing to lead employment gains are the services industries that are getting a big boost from retiring Baby Boomers, including the Health Care & Social Assistance, Leisure & Hospitality, and Financial Activities categories. This demographic development has been our main explanation for the resilience of consumer spending for the past three and a half years. So far, so good.
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