Executive Summary
The National Bureau of Economic Research (NBER) is the official declarer of recessions. Oftentimes a recession is not declared until a year after it begins, due to subsequent data revisions. The first graph below shows real GDP growth, including estimates for 2025 and 2026. Of note is the second graph in which the Atlanta Fed’s GDPNow model just drastically reduced the first quarter 2025 estimate to -2.8%. As I have noted previously, current national debt levels have reduced the GDP growth trend – now 12.5% below long-term trend (fourth graph). If the recent revision to first quarter growth is an indication of what is to come, the odds for a recession just increased.
For further analysis, continue to read The Details below for more information.
“Economic wounds must be healed by the action of the cells of the economic body, the producers and consumers themselves.”
–Herbert Hoover
The Details
Many economists expected a recession to start in 2024. As it stands currently, real annual GDP growth for 2024 was 2.8%. However, it is important to note that recessions are dated by the National Bureau of Economic Research (NBER). Oftentimes a recession is not declared until a year after it began. The reason for this delay is that much of the economic data is revised subsequent to its initial release. At times the revisions are substantial. For instance, the Bureau of Labor Statistics revised down the new jobs created for the year ended March 2024 by a whopping 589,000 jobs. Once the data is revised, the NBER can better determine when a recession starts and ends.
It appears that the incredible amount of stimulus injected into the economy as a result of the pandemic lingered slightly longer than some expected. But until the revisions are in, it is impossible to officially declare that a recession did not begin in 2024. The chart below from VettaFi shows quarterly real GDP growth on a quarter-over-quarter basis. The estimates for 2025 and 2026 are from the Conference Board.
In the chart above, the Conference Board estimated first quarter 2025 GDP growth at 2.5%. This is not too different than the first estimate by the Atlanta Fed’s GDPNow model. However, the chart below from the Atlanta Fed displays a massive downward revision to the first quarter 2025 forecast. The estimate dropped to -2.8%, which is recession territory. The fall was due to a drop in expectations for personal consumption and private investment.
As shown in the graph below from VettaFi, the current reported level, before major revisions, is below or near the levels witnessed at the start of many prior recessions.
As I have written previously, the tremendous level of Federal debt has slowed the rate of economic growth. When debt to GDP exceeds 90%, which it has done since 2010, for five consecutive years, economic growth slows by about a third compared to long-term trend growth. The graph below, also from VettaFi, shows that growth has fallen below the long-term trend line since the Great Recession, and has not accelerated back above trend. In fact, the gap to trend appears to be widening.
Economic growth was propped up by Federal stimulus and loose monetary policy. Also, when it appeared growth was slowing, government spending ramped up. Now that inflation and interest rates are higher and government spending is being slashed, consumers, who are now swimming in debt, will likely slow their spending. Consumer spending comprises about 70% of economic growth. And there is a real debate among economists as to whether government spending should be included in the GDP calculation, since the government does not “produce” anything. But that is a topic for another day.
Absent a major shift in policy, the stage appears to be set for a slowdown in growth. If the recent revision to first quarter growth is an indication of what is to come, the odds for a recession just increased.
The S&P 500 Index closed at 5,955, down 1.0% for the week. The yield on the 10-year Treasury Note fell to 4.23%. Oil prices decreased to $70 per barrel, and the national average price of gasoline according to AAA fell to $3.10 per gallon.
© 2024. This material was prepared by Bob Cremerius, CPA/PFS, of Prudent Financial, and does not necessarily represent the views of other presenting parties, nor their affiliates. This information should not be construed as investment, tax or legal advice. Past performance is not indicative of future performance. An index is unmanaged and one cannot invest directly in an index. Actual results, performance or achievements may differ materially from those expressed or implied. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy.
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