With the stock market recovering most of what it lost earlier this year and tariffs coming down from the scary levels of Liberation Day, the consensus thinking is that the past few months were just another recession scare like 12/2023 or 08/2024, it was only about tariffs, and the economy will forge ahead. But the economy has been deteriorating for years ahead of tariffs and new evidence of economic weakness not necessarily related to them is springing up; housing, low inflation, consumer spending, and labor. The following seven charts show economic weakness contrary, bigger, before, or different than the tariff effect — a reminder that the business cycle continues to move forward towards a recession and the economy is far from “solid.”
1. The Lantern Daily Economic Index (LDEI), which summarizes the “totality of the data” in real-time and now on the Bloomberg Terminal at LTRNLDEI <Index>, has fallen dramatically since February 14th, well before tariffs could be reflected in the data, and now to levels associated with the start of recessions in 2001 or 2007. Several of the elements within the index are shown in greater detail below, but the comprehensive LDEI illustrates that the economy is weakening overall.
2. Consumer spending started slowing in January (rare negative month for PCE and retail sales confirming its relevance) before the trade war. As of the release this morning, retail sales marked a second month of flat to negative growth after a pre-tariff buying surge in March. Retail sales have now fallen -0.7% annualized this year, reversing some of its 4.5% advance in 2024; indicative of a broad economic problem and bigger than tariffs.
3. Inflation rates have fallen in the last three months. Tariffs are inflationary and their biggest effect is thought by most economists to be ahead, but why have inflation rates fallen so much recently if the economy isn’t weak? Both services and goods are flat or falling over the last three months contrary to the tariff effect. On a 3-month annualized basis, core goods (goods ex. food), the group being watched most closely for tariff effects, have deflated -0.3%. Core services have been essentially flat at +0.1% and all items have risen just 1.0%.
Some categories of core goods (19.3% of CPI) have risen greater than trend seemingly due to tariffs (audio equipment, major appliances, photo equipment and supplies, tools, bedroom furniture) but the combined weight of those categories is just 0.7% of the CPI. There are far more categories growing less than trend or deflating such as alcoholic beverages, apparel, vehicles, jewelry and watches. Those categories add up to 9.9% of the CPI.
Core services (23.1% of the CPI) are essentially flat over the last three months, and it is mostly the same story there, although with no tariff relationship. Some services are growing greater than trend (financial services, car and truck rental, vehicle repair, hospital services); those worth 3.1% of CPI, but most are growing less than trend or deflating such as transportation, recreation, and telephone services; those making up 11.2% of CPI.
Together, it forms a picture of some tariff inflation evidence, but none of it making enough of a dent against most of the CPI disinflating/deflating. Imported goods are considered to be just 11% of the CPI. Between that relatively small amount and prices not easily being passed on to consumers without a hit to demand, there may never be a major inflation effect from tariffs because the economy is weakening all around them.
4. Housing has emerged as a point of acute weakness in the last few months across all housing indicators. One of them, construction spending, has fallen 1.9% over the last four months and is down -0.8% annualized over the last 11 months. There isn’t a clear link between tariffs and housing and the trend flattened about a year ago.
5. Consumer loan delinquencies are at recessionary levels. After the Trump administration removed student loans from a long forbearance period in place since the COVID-19 era, overall loan delinquencies are now near the level that they were just before the Great Financial Crisis. Surprisingly, student loan delinquencies are at about the same level now as they were back in 2007, but credit cards and auto loans which are just a fraction of the amount outstanding compared to mortgages (22.1%), have enough delinquencies such that the overall level is akin to the Q3 2007 mortgage crisis. The trend upwards began in 2023, more than two years ago.
6. The unemployment rate is at a cycle high and rising for the last two years (similar-to the timing of loan delinquencies rising above). When the unemployment rate flattened out last year, it was said that the labor market was stabilizing. With the new high released two weeks ago, the labor market is clearly weakening and it doesn’t look anything like the small amount the rate has risen during past soft-landings.
7. The ISM service sector PMI has been in a declining trend since last October to now contracting in May. The service-sector, by definition, is not part of the tariff affected goods sector.
There is something happening to the economy bigger than tariffs and it isn’t a mystery what it is. It is the business cycle, the elephant in the room that nobody likes to talk about when it starts to head south. I consider the trade war to be the catalyst for a recession, not the cause, similar-to the 1990 cycle where the oil price spike from Iraq invading Kuwait was the catalyst, not the cause for that recession. Oil prices started receding after two months but the recession continued because it was time for a recession as evidenced by economic data, the inverted yield curve de-inverting, several years elapsing since the last recession, and a recession scare one year before the recession began with pre-emptive Fed cutting — all very similar to now. The actual cause of recessions is the build-up of imbalances over time such that weakness in one sector moves through the other sectors; not whatever the nearest spark is to start it. With the breadth of indicators showing weakness above, that process is beginning to be evident now. I expect a recession to begin in the next few months.
Even if the Fed wants to watch inflation further before cutting rates, they still need to get on-side with where the economy is. Tomorrow’s FOMC meeting is a likely point for them to begin acknowledging weakness. At this point, continuing to characterize the economy as “solid” sounds ridiculous.
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