<p>Following the close of your columnist’s opening remarks, at a recently concluded CFO Conference that IMA India organised for its clients, Joy Basu, CFO of Times Internet, asked a pertinent question. Mr Basu inquired whether the US economy was likely to go into recession, an outcome of collapsing financial markets and declining consumer confidence. As of now, the probability of a recession is low, but admittedly the risks of an occurrence are higher than they may have seemed only a few weeks ago. President Donald Trump’s tariffs on imports, specifically from Canada and Mexico, but really from other countries as well, will raise prices for American consumers, creating a plunge in private consumption.</p><p> Just a few weeks ago, US stock were at all-time highs and the economy appeared to be firing on all cylinders. But now, recession fears are creating panic as US equities retreated by over 9% from their February highs. Be that as it may, the reality is that the US economy is not in danger of an imminent recession. It was growing steadily at the end of last year and the first quarter isn’t even over yet. The jobs market has been in fine fettle. A deep downturn is typically marked by mass job loss, bankruptcies and foreclosures. None of that has happened yet. Moreover, previous recession scares were, with the benefit of hindsight, overdone.</p><p> Still, the risk of a recession has in fact gone up, albeit from very low levels. And uncertainty about Mr Trump’s economic agenda on tariffs, is keeping investors and markets on an edge. The layoffs amongst federal employees would not have helped alter consumer perceptions. The ambiguity created around investment and trade has paradoxically both cooled demand, made businesses not invest and nudged consumers to think they should hold off before making large spending commitments.</p><p> That creates another risk – the spill-over effect of a negative wealth-effect phenomenon. As fortunes are destroyed by market turmoil, consumers cut back on spending as they no longer feel either as rich as they previously did, nor have the confidence to splurge on larger ticket items such as durables, cars and travel. US airlines have complained that, rather abruptly, travel demand has fallen. As things stand, we believe that the chance of a serious recession are about 20%.</p><p> A recent forecast from the Federal Reserve Bank of Atlanta also set off alarm bells, estimating that first-quarter GDP may decline by an annualised adjusted rate of 2.4%, which would be the first quarterly contraction in the U.S. since 2022. However, a separate projection from the New York Federal Reserve is more optimistic, forecasting robust 2.7% growth in the first quarter. Clearly, it would seem that predicting a recession, even by government agencies who have full access to government data, is difficult and experts disagree about how likely it is to happen.</p><p> At the time of writing this paper, it would be important to note that most American consumers are still in good financial shape and the nation’s businesses generally remain optimistic despite growing uncertainty about the trade conflicts and federal cuts. As trouble spots are mounting, economists are raising their inflation forecasts and downgrading their 2025 growth estimates. In the final count, it’s really up to the administration. If Mr Trump blinks on his tariff promises, analysts will have to revisit their forecasts and propositions.</p>
<p>Following the close of your columnist’s opening remarks, at a recently concluded CFO Conference that IMA India organised for its clients, Joy Basu, CFO of Times Internet, asked a pertinent question. Mr Basu inquired whether the US economy was likely to go into recession, an outcome of collapsing financial markets and declining consumer confidence. As of now, the probability of a recession is low, but admittedly the risks of an occurrence are higher than they may have seemed only a few weeks ago. President Donald Trump’s tariffs on imports, specifically from Canada and Mexico, but really from other countries as well, will raise prices for American consumers, creating a plunge in private consumption.</p><p> Just a few weeks ago, US stock were at all-time highs and the economy appeared to be firing on all cylinders. But now, recession fears are creating panic as US equities retreated by over 9% from their February highs. Be that as it may, the reality is that the US economy is not in danger of an imminent recession. It was growing steadily at the end of last year and the first quarter isn’t even over yet. The jobs market has been in fine fettle. A deep downturn is typically marked by mass job loss, bankruptcies and foreclosures. None of that has happened yet. Moreover, previous recession scares were, with the benefit of hindsight, overdone.</p><p> Still, the risk of a recession has in fact gone up, albeit from very low levels. And uncertainty about Mr Trump’s economic agenda on tariffs, is keeping investors and markets on an edge. The layoffs amongst federal employees would not have helped alter consumer perceptions. The ambiguity created around investment and trade has paradoxically both cooled demand, made businesses not invest and nudged consumers to think they should hold off before making large spending commitments.</p><p> That creates another risk – the spill-over effect of a negative wealth-effect phenomenon. As fortunes are destroyed by market turmoil, consumers cut back on spending as they no longer feel either as rich as they previously did, nor have the confidence to splurge on larger ticket items such as durables, cars and travel. US airlines have complained that, rather abruptly, travel demand has fallen. As things stand, we believe that the chance of a serious recession are about 20%.</p><p> A recent forecast from the Federal Reserve Bank of Atlanta also set off alarm bells, estimating that first-quarter GDP may decline by an annualised adjusted rate of 2.4%, which would be the first quarterly contraction in the U.S. since 2022. However, a separate projection from the New York Federal Reserve is more optimistic, forecasting robust 2.7% growth in the first quarter. Clearly, it would seem that predicting a recession, even by government agencies who have full access to government data, is difficult and experts disagree about how likely it is to happen.</p><p> At the time of writing this paper, it would be important to note that most American consumers are still in good financial shape and the nation’s businesses generally remain optimistic despite growing uncertainty about the trade conflicts and federal cuts. As trouble spots are mounting, economists are raising their inflation forecasts and downgrading their 2025 growth estimates. In the final count, it’s really up to the administration. If Mr Trump blinks on his tariff promises, analysts will have to revisit their forecasts and propositions.</p>
