3 signs the economy is in worse shape than we thought

Business Insider

a day ago

The US economy is facing some serious headwinds.
A weaker labor market, a slower baseline rate of economic activity at the start of 2025, and a pull-back from the mighty American consumer could all portend a bigger slowdown later this year.
There hasn't been a recession since the two-month pandemic downturn in 2020. The National Bureau of Economic Research makes the official call, saying its "definition emphasizes that a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months."
Below are three signs that the economy isn't as strong as it once was.
Economic growth last quarter was worse than we thought
The Bureau of Economic Analysis has released three estimates of the rate of economic growth for the first quarter of the year. They do this because, as they get additional information, they can get a better picture of the economy's growth.
Back in April, the BEA's initial estimate of the real gross domestic product's rate of change during the first quarter of the year was negative, the first decline since 2022. Imports, which subtract from growth, rose as businesses responded to President Donald Trump's tariffs.
However, this week's third GDP estimate was worse than expected and the previous two estimates. The third estimate showed real GDP dropped at an annualized rate of 0.5% compared to a 0.2% expected drop and the 0.3% drop reported in the initial advance estimate on April 30.
Consumer spending, which is crucial for GDP growth, cooled in the first quarter. It rose 0.5% compared to 4% in the last quarter of 2024. It was a main reason real GDP was revised down — real consumer spending was estimated at 1.8% in the advance release — and it's pretty ominous since consumers have generally been keeping the economy afloat the last couple of years.
One or two negative quarters of economic growth don't necessarily mean a recession; there are a lot of different measures that go into making that call. Mark Hamrick, senior economic analyst for Bankrate, told Business Insider the chance of a US recession is "modestly elevated, but far from certain."
May saw a rare drop in consumer spending
The American consumer may finally be reaching their limit.
Real spending has weakened, dropping 0.3% in May from April, according to a BEA report out Friday morning. All told, spending growth has been largely flat since late last year.
While the fall in spending might not seem like a lot, Justin Wolfers, a professor of public policy and economics at the University of Michigan, wrote on X that this is a rare occurrence. He added that it happened during COVID and the financial crisis.
"This may be a bit short of a seismic change, but it completely changes the narrative on the health of the consumer and reconciles the head-scratching disparity between plunging confidence and a swaggering consumer unencumbered by tariffs or a weakening labor market," wrote Wells Fargo economists Tim Quinlan and Shannon Grein.
Spending was stronger in April and March. Based on other data and BI interviews with consumers, people ended up buying cars, laptops, and other items in response to new tariff policies. That binge may be coming to an end. Spending on motor vehicles and parts in particular fell 6.0% in May, providing a large part of the drop in overall consumer activity.
Economists don't see spending getting better. "With employment growth slowing, income gains moderating, and the inflationary effects of tariffs building, households are likely to become more cautious with their spending over the summer and into the fall," said Lydia Boussour, EY-Parthenon's senior economist.
The job market is getting worse
"The gradual deterioration of US labor markets continues," economist Guy Berger wrote in his Substack on Thursday.
Continued claims for unemployment benefits, which measure how many people receiving those benefits have renewed them in the previous week, have been steadily climbing for the last few months, reaching almost 2 million for the week ending June 14 and hitting their highest level since November 2021, when the economy was still recovering from the pandemic shock.
The rise shows people could be having a harder time finding a new job. There were 7.2 million unemployed in the US in May, with 1.5 million unemployed for at least 27 weeks. There was one job opening for every unemployed person in April, down from two job openings for each in 2022 during the Great Resignation.
Still, initial claims, which show people who are newly applying for unemployment benefits and have been holding mostly steady this year, suggest many workers aren't losing their jobs — layoffs and discharges have been low.
"We're seeing this deterioration in continuing claims without a corresponding worsening in initial claims," Berger wrote.
Other recent data show job seekers have less bargaining power again. People are less likely to job-hop, partly because openings have cooled. Plus, wage growth isn't as great as a few years ago for job switchers.
It can be hard to even find an opening that matches their interests, especially if they are looking for a white-collar job, or the benefits they want, like a remote job.
Berger expects that the rise in continuing claims could likely lead to an increase in the headline unemployment rate in the coming jobs report. Unemployment held steady at 4.2% from March to May.