A slew of economic data is signaling that a recession is around the corner. The impending economic contraction, and possibly a recession, is primarily being caused by President Donald Trump’s tariffs imposed on Canada, China, and Mexico and the wave of retaliation which has now followed. Moreover, the chaotic layoff of federal workers will likely lead to a rise in unemployment and tightening of spending by those losing their jobs. Additionally, deportations of undocumented immigrants, as well as the fear thereof, is causing significant uncertainty in several important economic sectors such as construction, farming, hospitality, poultry, and small businesses.
On Monday, a closely watched model of gross domestic product level, the Federal Reserve Bank of Atlanta’s GDPNow, estimated significant decline of 2.8% in annualized growth for this quarter. This is a sharp contrast from a 2.3% increase last week. Unlike the quarterly GDP figure, which is a lagging indicator, GDPNow is the Federal Reserve’s running estimate of real GDP growth based on available economic data for the current measured quarter.
Other recent data and surveys are also showing troubling signs for the economy.
- The Consumer Confidence Index declined by 7.0 points in February to 98.3, largest monthly decline since August 2021.
- The Purchasing Managers Index registered 50.3% in February, 0.6 percentage points lower compared to the 50.9% recorded in January.
- U.S. retail sales declined by almost 1%, a significantly higher drop than economists anticipated.
- Walmart, a bellwether of consumer spending, announced in its latest earnings that it expects a slower 2025, CNN reported. Target and Best Buy also announced concern of how the tariffs will affect consumer spending and their corporate profits, CNN added.
- Jobs growth slowed in January. New jobs created were significantly lower than in November and December.
- U.S. bankruptcies are at their highest levels in 14 years, The CFO reported.
- Community banks were hit with a 12-year delinquency high of $6.1 billion due to their exposure to multifamily mortgages, according to a Globest report.
Foreign exchange traders and stock investors are showing that they are paying very close attention to the negative economic data. As soon as Trump announced that he would impose tariffs on Canada and Mexico, stock market and dollar indices plunged quickly. The U.S. dollar declined to a three-month low against a basket of major currencies, per MarketWatch’s Index. Traders sold the dollar due to fears of how tariffs will impact American companies and in anticipation that a weakening economy will lead the Federal Reserve to lower interest rates later in the year. Declines in interest rates cause domestic and foreign investors to sell U.S. treasuries and use those dollars to buy other assets including other currencies. If the dollar continues to decline, this could also signal that investors fear that the dollar is losing some of its safe-have status.
It is important to remember that the stock market is a leading indicator; investors are pessimistic about the direction of corporate earnings, so they are selling their investments now before stock prices fall even further. Both the Dow Jones Industrial Average and the S&P 500 plummeted overnight into Tuesday. The DJIA lost more than 600 points overnight, while the S&P 500 has erased all of its post-election gains and is now back to its November 2024 levels. Since February 19, the S&P 500 index has lost $3.3 trillion.
Given how sensitive bank earnings are to interest rates, the level of the dollar, and stock market prices, it is no surprise that bank stock prices contributed to the overall stock market decline. America’s largest banks- Bank of America, Citibank, Goldman Sachs, and JPMorgan, also had stock price declines. Until recently, U.S. banks have been in good financial health, but with the adverse effect of Trump’s tariffs and likely bank deregulatory actions, banks’ capital and liquidity is likely to deteriorate in the coming months.
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