This short note aims to decipher a striking chart related to current economic events. Since March 7, 2025, the United States and financial markets have been gripped by terrible uncertainty: does recession threaten economic activity? This Killer Chart reviews the country’s economic situation in an attempt to shed light on this question.
Download the PDF: killer-chart-3-r-for-the-united-states
Why is this interesting?
In March 2025, the US economic policy uncertainty indicator (EPI, blue curve on the Killer Chart) rose sharply. At the same time, volatility on the US stock markets increased, with significant losses on the S&P 500 on Monday, March 10, 2025.
The IPE tended to rise particularly sharply in connection with President Trump’s policy on tariffs. After announcing a 25-point increase in tariffs on imports from Canada and Mexico, a one-month postponement was finally announced on April 2. The erratic and unpredictable nature of these decisions fuels uncertainty, limiting companies’ ability to anticipate and adapt to the inflationary impact of customs measures.
The lack of clear progress on tariffs or other campaign promises (such as significant tax cuts) is eroding confidence, leading to arbitrage, with a preference for safe-haven assets[1] at the expense of US equity markets. At the same time, the statistical models of certain institutions (the Atlanta Fed and JPMorgan, for example) seem to indicate that the probability of a recessionary scenario is increasing.
What should we make of this?
Firstly, a rise in the IPE or other leading indicators, such as the inversion of the yield curve (see the proxy, yellow curve on the Killer Chart), are not always effective in predicting a downturn in activity. The Killer Chart illustrates this point, with periods of economic downturn (in red) that are not always preceded by reversal signals or signals that are not always followed by a recession[2].
At this stage, even though some forecasters have revised their projections downward, GDP growth forecasts for 2025 remain close to +1.5%, which is a respectable figure. Everything suggests that a slowdown scenario seems more likely than a recession. This can be explained in part by the existence of resilience factors, including growth in consumer spending, wages, and a strong job market.
Job creation(151,000 in February) continues to reflect a healthy labor market. However, the quality of the jobs created is deteriorating. Furthermore, the number of job vacancies per unemployed person was less than 1 in January, a first since the end of the health crisis, which is a warning sign as the unemployment rate rises slightly (4.1% in February). A slowdown seems inevitable, especially as layoffs and funding freezes in the public sector will inevitably have an impact on employment in 2025.
Maintaining confidence will be crucial to prevent these resilience factors from fading too quickly. The best way to achieve this will be to avoid further inflationary pressures (+3% in January). However, inflation remains the big unknown: in principle, the expected inflationary effects (customs duties, migration policy) would outweigh the disinflationary effects (budget cuts, lower energy prices).
The Fed is nevertheless being very cautious at present. In the short term, this limits its ability to further reduce interest rates. The prevailing scenario of a 75 bps rate cut by the end of 2025, according to CME FedWatch, could even be undermined if the risk of stagflation materializes in the event of inflationary pressures. Without tipping into a recession scenario, stagflation would probably be the worst-case scenario for a slowdown, as it would necessarily reduce monetary and fiscal room for maneuver.
On the fiscal front, tax cuts are raising high expectations. Concrete validation of these measures in future budgets could reassure financial markets. Would this ensure a degree of resilience? Not necessarily! For now, spending cuts would tend to favor a slowdown starting in 2025 and would not offset the effects of the promised fiscal stimulus. According to estimates by the Committee for a Responsible Federal Budget, tax cuts would also lead to a significant increase in public debt in the medium term. The budgetary situation will be the subject of internal debates at the end of 2025 to validate an increase in the debt ceiling to avoid another shutdown, debates that could reinforce downward pressure on the dollar and upward pressure on long-term rates…Here too, the inconsistencies of the Trump administration are evident, given Treasury Secretary S. Bessent’s statements regarding the desire for a strong dollar and lower long-term interest rates.
Resilience, Slowdown, Recession: if we had to choose just one of the three Rs, it would be Slowdown. The United States has solid fundamentals to avoid a Recession. However, the confusion surrounding the new administration offers little visibility, and it is this inconsistency that is currently causing tension in the markets. The short-term budget announcements, followed by monetary announcements in the second and third quarters, will need to be scrutinized closely, not only to assess the risk of recession but also to determine whether the slowdown is stagflationary or not.
Article written on 03/11/2024
[1] Such as the rise in the price of gold (+11.2% since the beginning of the year, ytd), the appreciation of the Swiss franc (+2.8% against the USD ytd), and the increase in net speculative long positions in the yen. US sovereign bonds have also seen a decline in yields (-35 points since the beginning of the year for 10-year yields), demonstrating a certain interest among investors in this asset class, even though fiscal issues do not appear to have been resolved.
[2] The most recent example is the inversion of the US yield curve between July 2022 and August 2024, with no recession during or at the end of this period.
[3] A higher proportion of jobs created were part-time, resulting in a reduction in average weekly hours worked (34.1), which is below the long-term average (34.4).
