March 14, 2025 – Is the U.S. economy teetering on the edge of a recession, or are the headlines just crying wolf again? Jim Puplava recently sat down with Ryan Sweet from Oxford Economics to unpack today's pressing economic questions. With recession fears dominating headlines, Ryan offered intriguing insights on whether these concerns are warranted—and his answer may surprise you. They discussed the complex interplay of tariffs, fiscal policies, and investment cycles, revealing opportunities and dangers ahead. Ryan also highlighted critical indicators he's closely watching for early recession signals, including one surprising factor he calls "game over" if triggered. For a nuanced perspective on inflation, the Fed, and the consumer economy, tune into the full conversation—you won't want to miss it.
Website: Oxford Economics Industry-specific Forecasting Services | Oxford Economics
X/Twitter: Ryan Sweet (@RealTime_Econ) / X
Mentioned during today's show:
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Recession Talk Prevalence: Daily media buzz about a recession persists, prompting a discussion on whether it’s a real threat or just noise, with Sweet offering a balanced perspective.
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Economic Vulnerability: Sweet highlights the economy’s fragility due to policy uncertainty, contrasting it with last summer’s growth scare, yet suggests a recession isn’t the base case.
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Tariffs and Uncertainty: The unpredictability of tariffs under the Trump administration is unsettling businesses, though clarity might emerge in 3-6 months, potentially easing investment fears.
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Fiscal Policy Impacts: Upcoming fiscal packages, including tax cut extensions and defense spending, could stimulate the economy once uncertainty lifts, though timing remains a wildcard.
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Investment Boom Potential: Major U.S. investments (e.g., Apple, Taiwan Semiconductor) totaling nearly $2 trillion could drive high-paying industrial jobs, bolstering growth if realized.
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Inflation Challenges: Tariffs and other pressures are stalling the Fed’s 2% inflation goal, forcing a cautious stance that limits rate cuts despite softening economic signs.
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Key Recession Indicators: Sweet watches initial jobless claims, residential construction, and corporate bond spreads as critical signals, noting layoffs could tip the scales.
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Bifurcated Economy: A divide exists between thriving high-income households and struggling lower-income ones, with consumer spending and government cuts adding complexity.
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Optimism Amid Caution: Despite current turbulence, Sweet sees a potential second-half recovery in business investment, especially in tech and AI, if uncertainty dissipates.
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Fed’s Tightrope: The Fed faces a bind—balancing inflation above target with growth concerns—leaving Sweet questioning how they’ll navigate without traditional tools.
Transcript
Jim Puplava:
Well, you can't pick up the papers or turn on the television each day without more and more talk about a recession. Is that a possibility? We spent 2022 and 2023 talking about a recession that never arrived. Well, let's find out what the prospects are today. Joining us on the program is Ryan Sweet from Oxford Economics. And Ryan, we were talking just before we went on the air. There's not a day that I pick up the Wall Street Journal where they're not talking about some article about a recession. Today, in the economy section, "Here's where to look for early signs of recession." Let's begin with that. What's your take? Is that a possibility?
Ryan Sweet:
Well, it's always a possibility. To kind of put things into context, the probability of a recession in any given year is about 15%. So, even on average, the odds of a recession occurring this year are probably a little bit higher than that. But I don't think it's the most likely outcome. And there are a couple of reasons behind that. But I understand why there are recession jitters. The economy's a little bit more vulnerable today than when we had our last growth scare last summer, and there's just this dark cloud of policy uncertainty hanging over the economy, and that can be suffocating. So, I sympathize with everybody that's worried about a recession. It's uncomfortable. But I do think it's important to remember that the stock market isn't the economy and vice versa. There have been plenty of times where we had a garden-variety correction in the stock market—so a 10% decline, even a 15% decline—and it doesn't push the economy into a recession.
Jim Puplava:
So, a lot of this talk about tariffs is unsettling because it almost seems it can change on a daily basis. But I would assume, Ryan, over the next three to six months that we're going to sort this out, whatever that is going to look like—whether it's reciprocal tariffs or something even larger—but we're going to probably know. I just don't see this going on the entire year. Once that clears up, they're talking about a stimulus package on this budget deal that they're working through, and then they're talking about tax cuts. So, what impact might that have on the economy?
Ryan Sweet:
Yeah, so there's going to be a lot—there are a lot of moving parts. And I think overall, when you look at the amount of uncertainty out there, you know, it's not just trade policy uncertainty. We can get to fiscal policy in a second. But with regards to trade policy, I hope you're right, and I think you will be, that we'll start to see a little bit more clarity over time. But, you know, these threats of tariffs are always going to be lingering during the Trump administration. That's one of their tools to try to achieve some of their industrial agenda. So, even though the uncertainty around Canada and Mexico may subside pretty quickly, there's always going to be that threat and that stick of tariffs hanging out there. And that's going to generate uncertainty. But I'm hopeful that we're going through the worst of it now and that once we get on the other side and some of this uncertainty becomes certainty, U.S. businesses—they'll adjust, they'll ramp up their equipment spending, they'll keep hiring as long as they have some clarity. But as long as this dark cloud hangs over the economy, it's really choking off business investment in equipment, structures, and private hiring. But timing-wise, as the uncertainty around trade should start to improve a little bit, we're going to have a lot of uncertainty around fiscal policy. The drama around the fiscal package—whether it's going to be one or two—we're just starting that now. But I do think this is going to have noticeable economic implications. I mean, I think it's pretty much a done deal that you get the extension of the Trump tax cuts. I would argue that that's not new stimulus and that's just keeping money in people's pockets. But as part of the package, you'll see an increase in defense spending. You know, that's going to be stimulative for the economy, and then some expensing for research and development and some bonus depreciation—so things that should really help propel business investment once we get on the other side of this significant bout of uncertainty.
Jim Puplava:
You know, one thing that we've seen—and of course, you don't know if this plays through—I added up, it's almost $2 trillion of investment in the U.S. You have Apple announcing half a trillion, you have Taiwan Semiconductor announcing over 160 billion. So, if these investments and plants come back, you're talking about a significant impact on the economy in the sense that these are going to bring industrial jobs, high-paying jobs versus, let's say, the service sector.
Ryan Sweet:
Yeah, we did a similar exercise. And heading into this year, I kind of laid out all the reasons to be optimistic about business investment in equipment. Now, one was that we went through a structures boom last year. So, real manufacturing structures investment was among the highest since the World War II era. That typically leads into an equipment cycle. So, that was an enormous tailwind. We had some fading recession concerns heading into this—towards the end of last year, heading into this. Now, things have changed on that front. But corporate bond spreads are still very tight. Corporate profit margins are still wide. There were—and there still are—lots and lots of fundamental supports for business investment. We're just going through a rough patch right now because of uncertainty. And a lot of the work that we've done around the economics of policy uncertainty highlights that the two parts of GDP—which is the value of all goods and services we produce—that are very vulnerable to and sensitive to policy uncertainty are equipment spending and structures investment. But the good news is, once we get on the other side of this uncertainty, business investment is very, very quick to respond. And another thing that we highlighted going into this year was also just all the tech investment. You listed a bunch of them there. But there's a lot of investment around data centers that's going to be fairly immune to this policy uncertainty because this is going to be gearing up for the AI boom that's coming to the economy. So, I think this is more a lull in the overall economy that we're kind of experiencing now. I know there's concerns about Q1 GDP potentially declining, but that's mostly attributed to a surge in imports. I've never seen a recession start because of rising imports, and they’ve got to end up somewhere—that's going to end up in inventories, and that will kind of offset some of the drag on GDP, hopefully. But all in all, I agree with you that I think when the dust settles, once we get through this initial phase of the tariff back-and-forth, I think business investment is going to have a pretty good year. It's just unfortunately going to be more concentrated in the second half of this year than throughout the whole course of the year.
Jim Puplava:
You know, usually you see, Ryan—you usually see the first year of a president's term, they get through all the stuff that kind of—the bad stuff, the stuff that isn't popular—you get that out of the way. So that when it comes to the midterms, and if you're running for reelection, you can start talking about the good stuff. So, it seems like we're doing that in spades right now.
Ryan Sweet:
It does. And I think one thing that was a little bit surprising, from at least my perspective—I thought the Trump administration would wait to be overly aggressive on the tariff front. We knew that was coming. I thought they would wait until they had the cover of the fiscal packages that are in the pipeline. But you're right, it seems like they're trying to get some of the bad out of the way early on. But unfortunately, if you do too much—you know, cutting government spending, laying off federal workers in large numbers, imposing tariffs, which are going to be somewhat inflationary—that's going to hurt consumer spending. You're kind of planting some of the seeds for a potential recession. And, you know, recessions are politically unpopular. And no matter what the catalyst of the recession, if you're the sitting president, you're going to own it. And that's something that's very difficult to shake over the course of your presidency—if there is an economic downturn.
Jim Puplava:
So, if you were looking for a recession, are there any key indicators you would be following that alert you that one's on the way?
Ryan Sweet:
Yeah. Contrary to popular belief, the people that run to the bunker first ahead of a recession—it’s not the consumer. And the consumer is more coincident. Once we're in a recession, they're firmly in the bunker, they're hunkered down. But ahead of a recession, you see a turn in business investment in equipment and in structures. Now, we've seen some weakness there, but not to the point where I think you've got to be overly concerned about a recession. I also keep a very close eye on housing—so residential investment, employment, and construction. Residential construction is a good indicator. Once that starts to roll over—and it doesn't have to roll over in large numbers—that's, you know, an ominous sign for the economy going forward. But, you know, I think we've chatted about this before. My favorite economic indicator is initial jobless claims, and it comes out every Thursday. It gives you a good barometer of the current state of the labor market. And why jobless claims are so useful is that they’re counting the number of people that are filing—not necessarily receiving, but filing—for unemployment insurance benefits. And, you know, generally, the catalyst—the causal relationship between a weakening economy and a recession—is more often than not layoffs. And if layoffs start to rise, it’s game over. If we start to see a significant increase in the number of people filing for unemployment insurance benefits, that's a red flag right there. But one exercise that I've done recently is kind of go back and look at all the catalysts, causes of recession since the 1920s. And generally, it’s a fiscal policy mistake, monetary policy error, big swings in inventories—which is less of a concern today than back in the 1970s and 1980s when we were more manufacturing-focused—and the popping of asset bubbles. And we can argue about how frothy the stock market is, but I don't think it’s an enormous bubble like the dot-com. It just doesn't seem like the traditional catalysts for a recession are there yet. Now, of course, a lot of things can happen at once. If we have a lot of bad luck where, you know, the Fed makes a policy error, the stock market goes on a terrible run, we get aggressive tariffs—that’s enough to push us into a recession. But in isolation, it doesn't seem like there's one catalyst hanging out there that's, you know, just gearing up to knock us into a recession.
Jim Puplava:
So, let's talk about another element that is really important, as we were speaking about—the Fed, inflation. We see some percolating inflation in the pipeline. What's your take on inflation here? Because the Fed would like to see it get down to their 2% level. I don't know if it’s going there. What's your take?
Ryan Sweet:
It’s not going there this year. It’s going to take time with the tariffs, and tariffs are going to be somewhat inflationary. It’s really going to slow the progress that we've kind of seen heading into this year, getting inflation back down to the Fed's 2% target. So, this last mile has turned into a marathon rather than a sprint for the Fed to get inflation back down to where they want it. And I think they're in a bind. They're in a very tough situation. The economy is showing a few signs here and there of softening. Some fissures are forming in the economy, but they can't cut interest rates because, generally, when you have a growth scare, your first line of defense is the Federal Reserve. And they kind of step in and cut interest rates, and that kind of calms financial markets, helps calm some of the concerns around a recession. But they necessarily can't do this this time around because inflation’s above their target. They know tariffs are coming, and that's going to push inflation even higher, albeit temporarily. So, the Fed's got to wait this out, and they’ve got to, you know, hopefully—they’re going to cross their fingers that this growth scare doesn't turn into anything worse. But, you know, in the end, I mean, the Fed may need a period where the economy’s growing, you know, below trend—maybe 1% GDP growth, one and a half—for a period of time to help wring out some of this underlying inflation. There's nothing they can do on tariffs. You know, they’ve got to see what is implemented and how aggressive the Trump administration is. But I think they're very focused on underlying inflation and inflation expectations. And you can see, you know, if you look at market-based measures, inflation expectations—they’re relatively anchored, but the consumer's nervous. And you can see it in the University of Michigan survey that, you know, consumers are expecting higher inflation, and that can become self-reinforcing, which will probably keep the Fed up at night because, in the end, their credibility and their ability to fight inflation is their credibility as an inflation fighter.
Jim Puplava:
I want to throw something out. I know when the Fed started jacking up interest rates in 2022—I mean, it’s hard to believe we went from half a percent to over 5% in a single year, almost—it was widely thought that that would lead to a recession. So, if you look back to 2022, 2023, a lot of talk about a recession. In my opinion, the government was just supercharging the economy with spending bills and stimulus—that’s one reason we didn't go there. So, the reason I'm bringing it up now—what happens with DOGE, when you start laying off a large segment of the government population, you're not getting that stimulus in spending. I think—what was it—90-something percent of the jobs last year were government. What happens when that is removed?
Ryan Sweet:
Well, it takes a lot of wind out of the economy’s sails, and, you know, that's why I would argue that the economy today is a lot more vulnerable and susceptible to a recession than it was last summer or in 2023 because we don't have the cover of fiscal support. There are a few more pain points in the economy. We have a much more bifurcated economy today, where high-income households are hanging in there and doing fairly well. Lower-income households—I'm very nervous about them; they're under a lot of financial pressure. Large businesses—good shape; smaller businesses are struggling. And we have a bifurcated labor market as well. If you have a job, it’s a great job market. If you're unemployed, it’s not horrible, but it’s a much more difficult job market than it’s been in recent years. It’s taking longer to find work. When you come with DOGE, the cuts in government spending aren't really showing up yet. That's likely not going to show up until the next budget. But the layoffs are, and this is where we've done a lot of work on mapping because, nationally, federal employment only accounts for about 2% of total jobs. State and local government is, by far and away, much larger. But these have knock-on effects. Roughly every job for a federal worker—they support one to two jobs elsewhere in the economy. So, this can kind of signal that you're starting to roll a snowball down a hill. You lay off a couple thousand federal workers here and there—that's going to start to affect retail, transportation, employment at barbershops, a lot of services—and it can just start rolling, and it becomes very difficult to stop that. Overall, I don't think the layoffs—the federal government, even accounting for the secondary effects—is enough to push us into a recession. The concern that I have is that layoffs can become contagious. You start to see layoffs going up. Other businesses, you know, start cutting hours and then eventually start cutting workers. Essentially, the herd mentality starts to kick in. And that's a concern that I have because, you know, if layoffs start to rise on a sustained basis, you know, that's pretty much game over for the economy, for the expansion.
Jim Puplava:
Yeah, I want to talk about—you know, the consumer. An article in the Wall Street Journal today: "Consumers keep bailing out the economy. Now they might be maxed out." So, you know, it’s almost like we have a bifurcation with consumption. If you own a home or you have a 401(k) program these last three or four years, even with inflation, you’ve got to be pretty happy. Your 401(k) is up, your house has appreciated in value. But let's look at the other consumer. If you don't own a home, you're renting, and you don't have a 401(k), things aren't so good.
Ryan Sweet:
Exactly. And this is something that we've been highlighting for the last couple of years—that we have a growing bifurcation across the consumer. Not just income and wealth inequality, but spending as well. The largest income cohort accounts for an enormous share of consumer spending. That's what’s been buffering us from some of these hiccups in the economy over the last couple of years. The high-income consumer kept spending, and partly that's because the stock market was rising, house prices were appreciating. The stock market wealth effect is—you know, so for every dollar of stock market wealth, how much of that is being spent?—that’s become increasingly potent over the last few years. And that's helpful on the way up, you know, when stock market equities are rising. But when you hit a period like now, it can also ding consumption because people are going to pause and then eventually potentially pull back on spending. And I think that's where, you know, one of the risks is—that the so-called wealth effect really starts to kick in in a greater negative force over the next few months if the stock market doesn't find its footing soon.
Jim Puplava:
All right, so if you were to, let's say, boil it down to three things that you would be looking for to tell you where the economy’s going—you mentioned unemployment claims would be right there at the top. What would two others be?
Ryan Sweet:
Residential construction. And I can't boil it down—sorry—to, you know, just one indicator within residential construction. But employment in construction, housing permits—that’s a, you know, pretty good leading indicator. That is something I would keep an eye on. I'm also watching very closely corporate bond spreads. You know, every little hiccup that we've seen in the economy over the last few years, bond spreads have remained fairly tight. You know, an economist’s favorite last words are "this time is different." But if corporate bond spreads start to fall, volatility higher—which they generally do—it could be a little bit of a problem. And the last thing I'm paying very close attention to—and probably this is the most important determinant of whether or not we see this period of a prolonged period of growth scare—is uncertainty. We need clarity on trade policy, we need clarity on fiscal policy, and we just need this dark cloud that's just been suffocating for the economy to begin to dissipate. And if that does, then, you know, we'll look back and just, you know, chalk this up to another period where it was a growth scare. If it doesn't, this has the potential to, you know, turn into something a little bit worse.
Jim Puplava:
All right, well, listen, Ryan, you guys put out a lot of great stuff at Oxford Economics. If our listeners would like to follow you, tell them an easy way that they could do so—the quickest and—
Ryan Sweet:
Easiest way is just go to our website, oxfordeconomics.com, and you can see some examples of the reports that we put out. We don't cover just the U.S.; we cover the global economy across the board.
Jim Puplava:
All right, well, listen, Ryan, as always, it’s a pleasure having you on the program. All the best, sir. And hope to talk to you again.
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