Is a recession around the corner?

What the data is telling me …

At 8:33 am today, I saw further slight strengthening in the US dollar against the euro and the yen. Data from Reuters evidenced declines from yesterday in the yields of ten-year bonds out of the United States, United Kingdom, Australia, Germany, and Japan. These declines told me that bond prices may be going up which could indicate that investors were running away from risks and heading to perceived safety of bonds.

Alas. The bad news from the BEA …

According to a release today from the U.S. Bureau of Economic Analysis, real gross domestic product decreased at an annual rate of 0.3 percent during the first quarter of 2025. During the fourth quarter 2024, annualized growth was 2.4%.

I have been avoiding social media today, but I would not be surprised if the YouTube and X posse start ringing the alarms about recession being one quarter away around the corner, but I digress …

The BEA goes on further to explain that the increase in imports subtracted from GDP. Makes basic economics 101 sense. GDP (national output) is a function of government spending, personal consumer spending, business investment, imports, and exports. Since the US does not spend for the production of imports, imports represent a reduction in gross production.

In addition to increases in imports, there was also a decrease in government spending which contributed to the reduction in GDP.

Politically, I expect the Trump Administration to spin this period of reduced growth as “transitory” given his goal to manifest a mercantilist agenda via an increase in exports. This will be an increasingly tough sell where the specter of an increase in price levels faced by consumers and businesses may work against the President.

Additional data from the BEA showed the price index for gross domestic purchases increased 3.4% in the first quarter of 2025 versus 2.2 % in the fourth quarter of 2024. The personal consumer expenditure index, the Federal Reserve’s preferred measure of inflation, increased 3.6% first quarter 2025 versus 2.4% fourth quarter 2024.

And it’s a bummer for labor compensation …

The news out of the BEA dampened what should have been decent news out of the U.S. Bureau of Labor Statistics. Compensation for the three-month period ended March 2025 increased 0.9 percent. Wages and salaries increased 0.8 percent and benefit costs increased 1.2 percent from December 2024.

While increases in labor compensation are occurring at lower rates, increases in benefit costs are at the same pace in 2024 (3.7%) and 2025, so far (3.8%).

My expectations on the one-week EUR/USD NADEX events contract …

I am estimating a futures rate of 1.1364 on Friday close of business on the NADEX. NADEX is offering a contract where the probability of the EUR/USD event contract closing above 1.1325 is 0.66 and the probability of an event contract closing above 1.1375 is approximately 0.56.

What will the Fed do next week? I don’t know …

The Federal Open Market Committee meets next week, May 6-7, to consider whether to change its target rate for overnight lending between banks. The Fed could, considering the data, look at the economy as needing a boost in order to spur economic growth and avoid a negative reading on GDP in the second quarter.

Recessions are classically defined as two straight quarters of negative gross domestic product (output). The Fed has a mandate from Congress to use its policy tools to bring about stable prices, maximum employment, and moderate long-term interest rates.

I don’t endeavor to say what the Fed should do, but given the risks in the economy of a slowdown, should not the rates reflect the risk of a further reduction in growth and instead of cutting rates, should not the Fed maintain or I dare say increase rates to reflect risks to the ability for near infinite numbers of contracts not being delivered on?

Alton Drew

30 April 2025

Disclaimer: The above post is offered as a thought exercise and should not be construed as trading or investing advice. I am using this opportunity to share my trading journey.

Should you need a review of your broker agreements or forward contracts, reach out to me to set an appointment at altondrew@altondrew.com.