3 signs the economy is in worse shape than we thought

New data indicates a significant cooling of the US economy, with first-quarter real GDP revised down to an annualized -0.5% and consumer spending notably weakening, including a rare 0.3% drop in May. Concurrently, the labor market is deteriorating, marked by continued unemployment claims nearing 2 million and a 1:1 job opening to unemployed ratio. These converging signs suggest an elevated risk of a broader economic slowdown or recession, challenging the previous narrative of a resilient consumer and strong economic activity.

Analysis

Recent economic data indicates a significant cooling of the U.S. economy, challenging the prevailing narrative of resilient growth. The first quarter's real GDP was revised downward to a -0.5% annualized decline, a worse figure than both the initial -0.3% estimate and market expectations, largely driven by a sharp deceleration in consumer spending growth to 0.5% from 4% in the prior quarter. This consumer weakness was further confirmed by a rare 0.3% real spending drop in May, an event previously associated with major economic shocks like the financial crisis. The decline was particularly pronounced in durable goods, with spending on motor vehicles and parts falling 6.0%. Concurrently, the labor market is showing signs of gradual deterioration. While initial jobless claims remain low, continuing unemployment claims have climbed to their highest level since November 2021 at nearly 2 million, suggesting job seekers are facing greater difficulty. The ratio of job openings to unemployed persons has also tightened significantly to one-to-one, down from two-to-one in 2022, signaling reduced bargaining power for labor. Collectively, these data points—weakening GDP, a pullback from the consumer, and a softening labor market—point to a tangible economic slowdown and a modestly elevated risk of recession.

Key Decisions for Investors

• Investors should consider reducing exposure to consumer discretionary sectors, particularly automotive and big-ticket retail, given the 6.0% drop in vehicle spending and the broader 0.3% fall in real consumer spending in May.
• Closely monitor upcoming reports on continuing unemployment claims and the headline unemployment rate, as economists cited in the report expect these figures to reflect further labor market deterioration.
• It is prudent to re-evaluate forward-looking earnings models for US-centric companies, as the data signals a fundamental shift away from the previously strong consumer demand that has underpinned corporate performance.