Is an economic recession pending? The short answer is no.
Real consumer spending fell 0.3% in May. This unwinds gains seen in March and April, when consumers stepped up purchases of imported goods such as autos in anticipation of tariffs. The May data leave real consumer spending on track to increase by a moderate 1.5% in the second quarter, which would be substantially less than the 4.0% growth seen in the first quarter. The retail sales data for June and July will help to clarify the extent to which these monthly gyrations are just shifts in timing or whether a more fundamental slowdown in consumer spending is under way.
Auto sales are one area where consumer spending has fluctuated wildly. Sales of cars and light trucks came in at 15.5 million in 2023 and 15.8 million in 2024. In March and April of this year, they surged to an annualized rate of 17.5 million. This reflected efforts by consumers to buy their cars before tariffs kicked in. Of course, the March and April data represent an anomalous and unsustainable sales rate. This makes it unsurprising that sales returned to earth in May, coming in at an annualized rate of 15.7 million.
There remain downside risks to consumer spending (on both autos and other products) in the next few months. The May sales rate for autos does not fully unwind the surge seen in March and April. Moreover, consumers and businesses are still dealing with a heightened level of uncertainty regarding tariffs policy and other potential policy changes coming out of Washington.
The housing sector is one place where the negative effects of this heightened uncertainty are most apparent. Sales of existing homes this spring are down almost 5% from the rate seen in the fourth quarter of 2024. Prices have also been decelerating. Given high inventories of unsold homes on the market, it is likely that prices are going to show some declines during the second half of this year when compared to year ago levels.
Recession at bay despite tariffs uncertainty
During the past few months, it has been an open issue whether policy changes with regards to tariffs (and other matters) would merely slow growth or tip the economy into a recession. Even though consumer spending and the housing market have slowed, the balance of the evidence suggests a slowdown rather than a recession.
One piece of evidence in favor of a slowdown rather than a recession comes from surveys of the manufacturing sector, such as the one done each month by the Institute for Supply Management (ISM). The ISM index edged up to 49.0 in June from 48.5 in May. The new orders index remained relatively week at 46.4, down from 47.6. The import and export orders indexes showed a partial recovery from steep declines in April and May.
These data are consistent with the slowdown but not a recession scenario. The Fed’s forecasts for GDP growth this year also incorporate a scenario of growth remaining below 2% in the second half of this year. Barring a new shock to the economy, this appears to be the most likely outcome—sluggish growth that skirts a recession. Such an outcome would produce a gradual rise in the unemployment rate over the next year. It currently stands at 4.2% and could approach 5% by the middle of 2026.
This would represent an unusual outcome. Typically, when the economy slows enough to produce a significant increase in unemployment, it tips over into recession. This is because the economy is highly vulnerable in such a situation. Even a small negative shock can push it into a recession.
At the same time, many firms and consumers have postponed decisions in the face of heightened uncertainty generated by tariffs policy. They will not postpone these decisions forever. In a sense, this represents investment and consumer spending that is deferred but not foregone indefinitely. Barring additional negative shocks, some of that deferred spending will gradually happen during the next year and could provide the basis for stronger growth at some point in 2026.
