A lot of us have recession on the mind lately, especially after this week’s news that Gross Domestic Product (GDP) shrank in the first quarter.
The GDP’s contraction by itself does not mean the economy is going into recession, according to Fidelity's Asset Allocation Research Team, which conducts research into the economy and business cycle. But the outlook for the economy has been clouded by uncertainty about US policies, as well as deteriorating business and consumer expectations.
To get a pulse on where the economy stands now, consider these 13 charts.
The picture for business
There are headwinds for business as well, especially trade policy uncertainty. But businesses are generally well-positioned to weather a storm.
Corporate earnings: Estimates for earnings growth have declined, but corporate earnings are still expected to be up more than 10% this year, and profit margins remain healthy. The largest companies have been the biggest contributors to earnings growth in recent years, and the market expects them to remain strong.
Manufacturing bullwhip: Trade policy uncertainty weighed on the US manufacturing sector. It can take time for this pressure to percolate into business results, but one early warning signal is the US bullwhip—defined as new orders minus inventories. When this is high, it can signal manufacturing will be ramping up, because new demand cannot be met by existing inventories. When it is low, it can signal little need for new manufacturing, because recent orders can easily be met by existing inventory. In the most recent reading, the US bullwhip had taken a sudden plunge.
Small-business uncertainty: Sentiment surveys show small businesses expressing near record-high levels of uncertainty amid the flurry of tariff and other policy announcements. It’s too soon to tell if this uncertainty will endure long enough to cause businesses to reduce their spending over time.
How consumers are doing
Consumers are the linchpin of the US economy, and they’ve held up remarkably well against the headwinds of inflation over the past few years.
Inflation: While inflation unexpectedly cooled in March, this is largely seen as a temporary reprieve, as tariffs threaten to fuel future price increases.
Consumer sentiment: Confidence among consumers has shown a steep decline over the past 4 months. But drops in consumer sentiment have historically not accurately forecasted a slowdown in consumer spending—unless labor-market conditions also begin to deteriorate. (More on the job market below.)
Consumers' expectation for inflation, another important indicator, has surged in recent months. These expectations are important because they can sometimes be self-fulfilling. Consumers may be more willing to accept price increases, and workers may demand higher wages to offset inflation, both of which can drive businesses to raise prices.
Consumer spending: As pessimistic as consumers have been in recent months, they have continued to spend money. Spending growth is still above the pre-pandemic average, buoyed by wage growth, which has outstripped inflation for the past 2 years.
Job market: So far, the job market has remained strong, despite rising policy uncertainty, rising business uncertainty, and government layoffs. Job openings have fallen slightly but remain above pre-pandemic levels.
The markets
Stocks: Stocks are considered an important “leading indicator,” meaning they tend to turn before the economy does. For example, bear markets in the US stock market tend to bottom out several months, or even quarters, before the US economy hits a bottom. That said, they’re an imperfect and noisy indicator, and not every market dip is followed by a recession.
Credit spreads: The bond market is often considered a better signal to follow. One key indicator investors have been watching recently is credit spreads, which are the additional yield bonds with default risk (such as investment-grade corporate bonds or high-yield corporate bonds) pay over US Treasurys. While credit spreads have been rising recently, they have remained well below peak levels from the past 10 years—indicating the level of risk, though higher, may still be relatively low in historical terms.
The bottom line
So far, the signals above are not flashing recession. But if you feel the need to prepare for the worst, you may want to consider these 6 ways to recession-proof your life, moves that can make sense in good times and bad.
Having a financial plan in place that accounts for all possibilities can be reassuring. To get your plan started, or to strengthen the plan you already have, consider working with a financial professional.