EconomicOutlook

The US Core PCE Price Index rose 0.1% in May 2025, signaling slower inflation and bolstering hopes for a potential rate cut by the Federal Reserve later this year. On a year-over-year basis, Core PCE increased 2.6%, aligning with economist forecasts and showing continued moderation in price pressures.
As the Fed’s preferred inflation gauge, Core PCE excludes volatile food and energy prices, offering a clearer view of underlying inflation trends. The latest data suggests that consumer demand is softening and price stability is gradually returning.
Markets responded positively, with bond yields edging lower and stocks gaining modestly, reflecting increased optimism over the Fed’s monetary policy trajectory.

Investors will watch closely in the coming months to see if this disinflationary trend continues, potentially prompting the Fed to ease rates as early asSeptember.
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Introduction
Federal Reserve Chair Jerome Powell recently delivered a clear message regarding the health of the U.S. economy, asserting that the nation is not currently in a recession. This statement arrived amidst increasing economic uncertainty and heightened concerns about a potential economic downturn. The declaration aimed to provide confidence to markets and the public, emphasizing the underlying strength of the economy despite various headwinds. This report critically examines the basis of Powell's assertion by analyzing key economic indicators, exploring the nuanced definition of a recession, and considering the perspectives of economists and financial markets.
The Federal Reserve's Stance and Economic Indicators
Powell's Core Message
During a recent speech, Federal Reserve Chair Jerome Powell stated, "The US economy continues to be in a good place". This nine-word statement was intended to reassure the public and markets amidst rising recession concerns and market volatility. Powell's perspective focuses on the broader, long-term picture of the economy, rather than fixating on immediate, short-term problems. He highlighted several key pillars supporting his assessment: consistent Gross Domestic Product (GDP) growth, robust job creation, and stable inflation rates that align with the Fed's long-term goal of 2%. This comprehensive view underpins the Fed's current policy approach.
GDP Performance
While Powell emphasized consistent growth, recent GDP figures present a more complex picture. The U.S. economy expanded at a solid pace in the fourth quarter of 2024, with GDP growing at a 2.4% annual rate. However, the first quarter of 2025 saw a contraction, with real GDP initially estimated to have decreased by 0.3% and later revised to a 0.2% decline. This marked the first quarterly contraction in three years.
The primary factors contributing to this Q1 2025 contraction were a significant increase in imports and a decrease in government spending. The surge in imports, particularly goods imports, was largely attributed to businesses stockpiling ahead of anticipated tariffs, which are a subtraction in GDP calculation. This pre-tariff surge contributed over five percentage points to the negative headline GDP figure. On the other hand, the decrease in government spending was primarily due to lower federal defense expenditures. These negative movements were partially offset by increases in private investment, consumer spending, and exports, which provided some counterbalancing strength.
Consumer spending, a crucial driver of economic activity, showed a mixed performance. While it softened overall, rising at an annual rate of 1.8% in Q1 2025 (the slowest pace in seven quarters), spending on services remained resilient, particularly in areas like healthcare and housing and utilities. Conversely, spending on durable goods experienced a notable decline, especially in big-ticket items such as motor vehicles. The Q1 2025 GDP contraction, while negative, was thus heavily influenced by specific, potentially temporary factors like pre-tariff import surges and government spending adjustments, rather than a broad, systemic weakening across all economic sectors. This suggests that a nuanced view is necessary, extending beyond a simple reliance on the "two consecutive quarters of negative GDP" rule to assess the economy's true state.
Labor Market Health
A significant pillar of Powell's argument against a recession is the robust health of the U.S. labor market. In May 2025, the unemployment rate remained stable at 4.2%, staying within a narrow range of 4.0% to 4.2% since May 2024. Total nonfarm payroll employment increased by 139,000 in May, which is consistent with the average monthly gain of 149,000 over the preceding 12 months. Employment continued to trend upward in key sectors such as health care, leisure and hospitality, and social assistance.
Powell explicitly stated that "many indicators show that the labor market is solid and broadly in balance" and that it is "not a source of significant inflationary pressures". This sustained strength in employment, characterized by low unemployment and consistent job creation, stands as a strong counter-indicator to widespread recessionary fears. However, the labor market faces evolving dynamics. The foreign-born workforce, for instance, shrank by over a million people in the last two months of available data, a development linked to strict border controls and large-scale deportations. This reduction in immigrant workers could potentially exert upward pressure on inflation by the end of the year, particularly in sectors heavily reliant on immigrant labor such as agriculture, construction, food processing, and leisure and hospitality. This underlying pressure point adds a layer of complexity to an otherwise strong labor market narrative.
Inflation Trends
Inflation has been a central concern for the Federal Reserve. The Consumer Price Index for All Urban Consumers (CPI-U) increased by 2.4% over the 12 months ending May 2025. The core CPI, which excludes volatile food and energy prices, rose by 2.8% over the same period. The shelter index was a primary contributor to the monthly increase, rising 0.3% in May and 3.9% over the past year.
Powell has maintained that while inflation can be volatile month-to-month, longer-term inflation expectations remain stable and consistent with the Fed's 2% target. He acknowledged that near-term measures of inflation expectations have moved up, with surveys of consumers, businesses, and forecasters pointing to tariffs as a key driving factor. Indeed, the Fed's own projections anticipate a meaningful increase in inflation this year due to the impact of tariffs. This expectation creates a tension: while current inflation figures are relatively close to the Fed's target, the looming effects of trade policy introduce significant uncertainty and potential upward pressure on prices. This complex outlook complicates the inflation picture, requiring careful monitoring to prevent temporary price increases from becoming entrenched inflationary problems.
Monetary Policy and Interest Rates
In response to the evolving economic landscape, the Federal Reserve has maintained a steady course on interest rates. The Federal Open Market Committee (FOMC) unanimously voted to keep the federal funds rate unchanged at 4.25%-4.5% during its June meeting, a level maintained since December 2024. This decision reflects the Fed's belief that its current monetary policy stance positions it well to respond to potential economic developments.
Despite holding rates steady, the Fed has signaled a potential 0.5 percentage point cut later in 2025. However, divisions exist among policymakers regarding the timing and extent of future rate cuts; while a significant majority supports cuts later this year, seven out of nineteen policymakers projected no rate cuts at all for 2025, and two projected only one. This divergence highlights the complexity of the economic outlook. Powell has articulated a "wait and see" approach, emphasizing the need to observe how the economy evolves, particularly in response to the impacts of tariffs. He noted that if inflation pressures remain contained, rate cuts could occur sooner, but if inflation and the labor market remain strong, cuts could be delayed.
The Fed's cautious stance on interest rates, despite external pressures, reflects a careful assessment of current economic strength against future inflationary risks, particularly those stemming from trade policy. President Trump has publicly urged the central bank to cut interest rates more aggressively, arguing that lower borrowing costs would stimulate the economy and reduce federal debt interest payments. However, Powell has firmly stated that the Fed's decisions are based solely on economic data, the outlook, and the balance of risks, without political influence.
Adding another layer of complexity, bond yields have been rising in recent months, unexpectedly increasing after geopolitical events such as Israel's attack on Iran. Ordinarily, bond yields fall during times of turmoil as investors seek the safety of U.S. government debt. This unusual trend suggests a potential erosion of investor confidence in the U.S. government's creditworthiness. The combination of high federal debt and rising bond yields increases borrowing costs for the government and can make mortgages, car loans, and other consumer borrowing more expensive. This indicates that the rising bond yields add another layer of potential instability to the financial landscape, further justifying the Fed's cautious and flexible approach to monetary policy.
Understanding Recession Definitions
NBER Definition
The National Bureau of Economic Research (NBER), an independent nonprofit organization, is widely recognized for determining the start and end dates of recessions in the United States. The NBER defines a recession not by a rigid numerical formula, but as "a significant decline in economic activity that is spread across the economy and that lasts more than a few months". This definition emphasizes three key criteria: depth, diffusion, and duration.
To assess these criteria, the NBER evaluates a variety of monthly economic indicators. These include real personal income less transfers, nonfarm payroll employment, real personal consumption expenditures, manufacturing and trade sales adjusted for price changes, employment as measured by the household survey, and industrial production. The NBER's approach allows for flexibility, where an outsized impact in one criterion can compensate for a weaker impact in another. For instance, the recession at the beginning of the COVID-19 pandemic was declared despite its brevity (two months), because the drop in activity was so profound and widespread. This comprehensive, multi-indicator approach to defining a recession supports Powell's assertion that the U.S. is not currently in one, even with a negative Q1 GDP, given that other critical indicators like employment remain robust.
Common Misconceptions
A popular rule of thumb often used to identify a recession is two consecutive quarters of decreasing real (inflation-adjusted) GDP, often characterized as "negative growth". While many U.S. recessions since 1947 have featured negative GDP growth, the NBER explicitly states that it does not use this "two-quarter rule" as its sole definition. The NBER's reasoning includes the importance of not relying on just one indicator, considering the depth of decline, and utilizing more frequent monthly data for a timely assessment.
A notable example that highlights this distinction occurred in 2022, when real GDP growth was negative in both the first and second quarters. Despite this, a recession was not declared, largely because the negative GDP figures were primarily due to high inflation rather than a broad economic contraction characterized by high unemployment or other typical recessionary conditions. Furthermore, not all recessions adhere to the two-quarter rule; the COVID-19 recession, for example, lasted only two months, which is less than a single quarter. This underscores that while GDP is a vital measure, a holistic assessment of economic health requires considering a broader array of indicators, consistent with the NBER's methodology.
Expert and Market Reactions
Economists' Perspectives
The economic community exhibits a range of views following Powell's statements, reflecting the inherent uncertainties in the current environment. Many economists and Wall Street investors continue to anticipate interest rate cuts from the Federal Reserve later in the year, despite the Fed's current "wait and see" stance. However, the sweeping tariffs imposed by the Trump administration have injected a tremendous amount of uncertainty into the U.S. economy and the Fed's policy decisions. Ryan Sweet, chief U.S. economist at Oxford Economics, described the uncertainty surrounding trade policy as giving him "night terrors," emphasizing that businesses are likely to delay hiring and investment when the "rules of the road" are unclear.
While Powell projects confidence, some economists temper optimism with concerns over rising debt and persistent inflation. CEOs also remain cautious, with some expecting a mild recession. This divergence between Powell's confident "no recession" stance and the caution expressed by many economists and business leaders highlights the significant uncertainty introduced by geopolitical factors such as tariffs and the Middle East conflict. These external pressures could rapidly alter economic trajectories, potentially leading to a sharp economic slowdown that might even cool inflation on its own, prompting the Fed to shift towards interest rate cuts.
Market Response
The financial markets' reaction to Powell's testimony has been relatively muted, with investors and traders finding little in the way of surprises. This suggests that the market had largely anticipated the Fed's cautious posture and "wait and see" approach, indicating that a degree of uncertainty and policy inertia had already been priced in.
Following Powell's remarks, the U.S. Dollar (USD) Index remained in the lower half of its daily range, losing approximately 0.3%. Conversely, gold prices approached the $3,300 threshold, and the EUR/USD and GBP/USD pairs reached fresh multi-year highs. Market positioning indicates that the USD could gather strength if Powell signals continued patience regarding rate cuts, whereas a significant USD selloff might occur if he were to explicitly open the door for a policy-easing step in July. The absence of major market moves or policy missteps suggests that Powell successfully achieved his objective of keeping the Fed steady and minimizing political interference, thereby maintaining market stability in the face of ongoing economic uncertainties.
Challenges and Outlook
Key Economic Challenges
Despite Powell's optimistic assessment, the U.S. economy faces several significant challenges that could influence its trajectory. A primary concern is the impact of tariffs, which are widely expected to push up inflation and potentially weigh on economic activity. The Fed anticipates that tariff-induced inflation will become more apparent in consumer prices over the summer months. Geopolitical risks, such as the conflict in the Middle East, also pose a threat, as they can trigger spikes in crude oil prices, jeopardizing efforts to keep the overall cost of living in check.
The nation's high federal debt, which totaled $36 trillion, combined with rising government borrowing costs, represents another substantial challenge. Interest on the federal debt has become the government's third-biggest expense, after Social Security and Medicare. This situation not only burdens the government but also makes consumer borrowing, such as mortgages and car loans, more expensive. Furthermore, while consumer spending has shown resilience in some areas, there are signs of softening demand in others, and durable goods spending has notably declined. A divergence between consumer sentiment (which has weakened) and actual spending (which remains resilient) also presents a complex picture for policymakers. These factors collectively suggest that while the economy exhibits strengths, it is navigating a period of considerable vulnerability.
Factors Supporting Resilience
Despite the challenges, several factors contribute to the U.S. economy's resilience, supporting Powell's assertion that it is not in a recession. Consumer spending, particularly on services, continues to be a robust engine of economic activity. This is evident in increases in healthcare and housing and utilities expenditures. The labor market remains strong, characterized by low unemployment rates and consistent job creation, which are fundamental indicators of economic health.
Furthermore, individual wealth in the U.S. remains relatively high compared to liabilities, providing a buffer against economic shocks. This allows consumers to maintain spending levels even when facing inflationary pressures or other economic uncertainties. The Federal Reserve's "wait and see" approach to monetary policy also provides crucial flexibility. By not committing to immediate rate adjustments, the Fed can adapt its strategy as new data emerges on inflation and the labor market, allowing it to navigate the evolving economic landscape prudently. This complex interplay of strengths, such as a strong labor market and resilient services spending, alongside vulnerabilities like tariffs and rising debt, suggests that the U.S. economy is in a resilient but potentially fragile equilibrium.
Conclusion
Federal Reserve Chair Jerome Powell's assertion that the U.S. economy is not in a recession is supported by a nuanced assessment of key economic indicators, even in the face of a recent quarterly GDP contraction. The robust labor market, characterized by low unemployment and consistent job creation, stands as a powerful counter-indicator to recessionary fears. While first-quarter GDP showed a decline, this was largely attributed to specific, potentially temporary factors such as pre-tariff import surges and reduced government spending, rather than a broad-based economic weakening.
The NBER's comprehensive definition of a recession, which considers depth, diffusion, and duration across multiple indicators (including employment, income, and consumption) rather than solely relying on the "two consecutive quarters of negative GDP" rule, provides a more accurate framework for understanding the current economic situation. This broader perspective aligns with Powell's confidence, as other critical economic pillars remain strong.
However, the economic landscape is not without its challenges. The ongoing uncertainty surrounding the impact of tariffs on inflation and economic growth, coupled with geopolitical risks and rising federal debt, necessitates the Federal Reserve's cautious "wait and see" approach to monetary policy. While immediate recession appears unlikely based on current broad indicators, the dynamic interplay of these factors means the economic landscape is subject to evolving pressures. The economy exhibits a resilient but potentially fragile equilibrium, requiring continuous monitoring and adaptive policy responses.
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