Is a recession on the horizon?
The economic landscape was already turbulent due to tariff concerns and various uncertainties. Recent PCE and GDP data releases and The University of Michigan’s Consumer Sentiment Report have further muddied the waters, significantly increasing the complexity of the situation. These new figures have theoretically elevated the risk of a potential recession. Prior to these releases, numerous indicators were already signaling a potential recession, including the inverted yield curve. Yes, the yield curve has inverted once again. The spread between the 10-year Treasury yield and the 3-month Treasury yield turned negative, with a difference of -0.03 as of March 24, 2025. Additionally, parts of the yield curve, such as the 2-year and 5-year yields, have also shown signs of inversion recently, further amplifying concerns about economic slowdown. We must also consider other indicators, such as the elevated delinquency rates among FHA borrowers. Considering the fact that the unemployment rate remains very low, the high delinquency rate among FHA borrowers is a serious concern that warrants attention.
Most economists believe the president will eventually adjust his policies to prevent a recession.Unless there is a change in direction, stock prices will continue to decline and financial markets will face ongoing uncertainty and volatility.
There is some interplay between recessions and stock market performance. However, the relationship is inconsistent and influenced by various factors, making the stock market an unreliable standalone indicator of recessions.
While the economy is slowing, it's not showing clear signs of an imminent recession. The moderation in growth is accompanied by persistent inflationary pressures and a still-tight labor market. The balance of risks to growth forecasts is tilted to the downside, primarily due to policy uncertainties and global economic conditions.
PCE
The Federal Reserve favors the Personal Consumption Expenditures (PCE) price index over the Consumer Price Index (CPI) as its preferred measure of inflation.
The Personal Consumption Expenditures (PCE) price index data for February 2025 was released today, showing:
Overall PCE inflation:
Monthly increase: 0.3%
Year-over-year increase: 2.5%
Core PCE inflation (excluding food and energy):
Monthly increase: 0.4%
Year-over-year increase: 2.8%
Consumer spending:
Increased by 0.4% in February
Real PCE (adjusted for inflation) rose by 0.1%
Personal income:
Increased by 0.8% in February
Disposable personal income rose by 0.9%
Savings rate:
Increased to 4.6% from 4.3% in January.
The core PCE inflation rate of 2.8% is above the Federal Reserve's 2% target, indicating persistent inflationary pressures. This data, combined with moderate consumer spending growth, has raised concerns about potential stagflation amid escalating trade tensions.