By Tim Courtney, Chief Investment Officer

Please note: The market data mentioned in this article reflects conditions as of 3/31/25. Given the recent market volatility, particularly in response to tariff news, we will be providing an updated analysis next week to address the latest market dynamics.

The word ‘recession’ has made its way back into press headlines, accompanied by stories of stubborn inflation, weakening consumer health and the impact of tariffs.¹ After the S&P 500 hit a technical 10% correction in mid-March,² discussions about a recession accelerated with increasingly hyperbolic language. Let’s review some primary factors that have been affecting our economy since 2020—the last time we had an official recession, which lasted two months.³  

Regarding economic growth, we believe it is likely the economy is slowing, and this has been our base case for over a year and a half. The interest rate hikes of 2022 and 2023 were put into place specifically to slow growth and inflation.⁴ As a result, it has been more costly to borrow or maintain debt, which is putting pressure on consumers who have increased their debt to record levels. For reference, delinquencies in credit card payments and car loans are nearing levels that were last seen before previous recessions.⁵

Government spending also has had an effect on our economic situation. In 2024, the government spent $6.8 trillion, up from $4.4 trillion in 2019 ($5.5 trillion in 2024 dollars).⁶ Excluding interest, real spending has increased by about $1 trillion per year.⁷ It is possible that without this extra spending we could have gone into recession already. There is speculation that if spending is actually cut, which is a big if, it could tip the economy into recession. But an obvious question remains: should we do whatever is necessary to avoid recession?

Historically, economic recessions have occurred fairly frequently. From 1900-1991 there were 21 recessions, one about every four years.⁸ Over the last 34 years, there have been only three recessions, two if we don’t count the two month recession caused by lockdowns in 2020.⁹ Recent decades have been fairly positive if the main goal is to avoid recessions. However, recessions do fulfill a valuable purpose by curbing excessive consumer and business spending, reallocating unproductive capital and reducing the number of money losing enterprises. This process is vital for maintaining long-term market and economic health.

We’re not advocating for or predicting a near-term recession, but are suggesting that higher spending and lower rates since the last traditional recession in 2008 have probably prevented a recession from naturally forming. This recession prevention has come at a cost: bigger debts and interest payments, a 25% slug of inflation and high levels of speculation in markets.⁴

We may end up seeing a contraction in first quarter Gross Domestic Product (GDP) if imports (a detractor to GDP) spiked as producers attempt to front-run tariffs. So far, markets are not giving a clear signal about recession. Assets most sensitive to recession, including lower quality bonds, value companies and commodities are all positive year-to-date. Interestingly, in 2025, U.S. large tech companies, typically the most protected from an economic decline, have fared the worst, down 10%.¹⁰ Diversification remains the best strategy to navigate uncertainty. Feel free to contact your Exencial advisor with any questions.

Sources:

1. CNBC.com (3/18/25) – Slower economic growth is likely ahead with risk of a recession rising, according to the CNBC Fed Survey
2. MarketWatch (3/13/25) – S&P 500 falls into correction territory as Trump’s trade war escalates. Here’s what history says could happen next.
3. National Bureau of Economic Research (7/19/21) – Business Cycle Dating Committee Announcement July 19, 2021
4. Investopedia (3/19/25) – What Is the Relationship Between Inflation and Interest Rates?
5. Federal Reserve Bank of Philadelphia (1/22/25) – Large Bank Credit Card and Mortgage Data 2024 Q3 Narrative
6. Congressional Budget Office (12/31/24) – www.cbo.gov Publications 56324 and 61181
7. Fiscal Data Treasury.gov (12/31/24) – Finance Guide to Federal Spending
8. St. Louis Fed (3/31/25) – FRED Data on NBER based Recession Indicators
9. Investopedia (3/25/25) – U.S. Recessions Throughout History: Causes and Effects
10. CNBC.com (3/21/25) – The Magnificent 7′s lousy year, by the numbers

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S&P 500® Index (S&P 500®) is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and covers approximately 80% of available market capitalization.