Heresy Financial: Fed Issues Urgent Warning: Recession Next Month
Recent economic data has started to turn over. Some predictions now suggest that the economy could shrink in the first quarter of 2025. If that does happen and continues into the second quarter, it could mean that the year started out in a recession.
Why the warning? The move to cut government spending is a big part of the equation. The Department of Government Efficiency (DOGE) is targeting $1 trillion in annual spending cuts.
Yes, that would free up private sector spending over time. But the loss of that added government spending now is bad for the economy now. Plus, laying off government workers will lead to higher unemployment until they can find a position in the private sector.
Meanwhile, rising tariff rates are also leading to lower expectations for the economy. Tariffs act as a tax on a specific good, so raising them reduces spending expectations.
Overall, the combination of cutting government spending and raising tariffs is mixed. It could lower the deficit substantially. Today’s massive deficits can’t be sustained forever, especially at today’s interest rates.
But the right-sizing of government spending does mean a period of economic pain. The real question is the severity of that pain. And how much it impacts the private sector. That’s part of the rising uncertainty that’s hit stocks over the past few weeks.