Key economic indicators flashed recession warnings as Treasury Secretary Scott Bessent said on February 25 that the US was in a private sector recession and that the Trump administration’s goal was to “re-privatize” the economy.
“The previous administration’s over-reliance on excessive government spending and overbearing regulation left us with an economy that may have exhibited some reasonable metrics but ultimately was brittle underneath,” Trump’s chief economic official said in a speech.
Whether the US tumbles into recession this year probably depends on one key political issue: Will the Trump administration use the threat of tariffs to coax its foreign trading partners to increase investment in the US, or will tariffs start a trade war with Europe and Asia?
The United States is so import-dependent that higher tariffs will have a powerful impact on domestic inflation. If the response of the European Community, Japan and China to the tariff threat is an increase in investment in the US, though, the outcome will benefit US growth.
Recession signals include the worst consumer confidence survey numbers since 2021, a drop in freight shipment volume, a plunge in equipment investment in the fourth quarter of 2024 and a 0.9% drop in retail sales (before factoring in inflation) in January.
The top tenth of US earners do half the consumer spending, so it’s hard to draw a connection between the abysmal survey data published last week by the Conference Board and the University of Michigan. The average consumer may be pessimistic, but the spending decisions of a tenth of US households will set the pace for aggregate data.
A major concern is the drop in private investment during the fourth quarter. Business investment took nearly 6/10ths of a percentage point off fourth quarter GDP growth, the worst investment report since 2021.
Gross domestic product is one of the least reliable series we have, and the investment component is volatile, so the final GDP report for 2024 should be viewed with caution. But it’s still a concern.
The Biden CHIPS Act prompted a surge of investment in subsidized semiconductor fabrication plants. The end of the Biden subsidies probably explains a large part of the decline in equipment investment.
Nondefense capital goods orders excluding aircraft is a harder number, and this shows a year-on-year decline of more than 20% as of December 2024.
One of the few hard data points we have on US economic activity is the CASS Index of freight volume, compounded from billions of freight payments made through CASS. This shows a sharp drop in January. Weather might be a factor, to be sure, but freight volume has been declining for several months.
Treasury Secretary Bessent’s “private sector recession” could get worse quickly if tariffs translate into higher prices for both consumers and industrial users.
Imports of capital goods (excluding autos) have risen by nearly 40% in real terms since 2020. The US now imports more capital goods than it produces at home, including semi-finished goods and other production inputs.
Because so much of US manufacturing depends on foreign inputs, it will be hard for domestic manufacturers to replace imports with local production. It’s impossible to tell ex ante how much of tariffs might be absorbed by foreign exporters, either through lower prices, or currency devaluation, and how much will translate into price increases.
In the case of 20% tariffs on Chinese imports and 25% tariffs on European imports, as the Trump administration threatens, the answer in both cases will be, “a lot.”
Follow David P Goldman on X at @davidpgoldman
