Despite relatively solid growth in the first quarter, our economic landscape is showing concerning signals that merit attention. The current administration's policy choices—and their implementation approach—have compounded existing economic headwinds. While the extreme policy volatility has somewhat subsided, allowing businesses to cautiously resume operations, these additional pressures are likely to persist moving forward.

Tariff Impact and Economic Fundamentals

Even with some de-escalation on the tariff front, we're still facing significantly higher average effective tariff rates compared to earlier this year. Looking at economic fundamentals, the situation becomes clearer: nominal income growth continues to cool while prices increase. This creates a straightforward equation:

Cooling nominal income + higher prices = lower real growth.

It's that simple.

Recession Risk: Beyond Semantics

Whether we technically enter a recession might ultimately be a semantic discussion. What matters is the trajectory: growth is slowing, and unemployment appears poised to rise before conditions improve. This economic shock stems from self-induced policy decisions, creating a constant tension between optimism from de-escalation efforts and rising recession concerns.

The market rally following the post-Liberation Day lows reflects reduced fears of a crisis-level event, while simultaneously attempting to quantify potential earnings impacts from elevated recession risks. This tug-of-war will likely continue, maintaining the potential for protracted, wide-ranging market trading as investors price in a normal economic downturn rather than a catastrophic event.

Long-Term Perspective

While immediate growth catalysts are difficult to identify, markets may have largely priced in a typical economic slowdown. Initial conditions play a crucial role—household and corporate balance sheets remain too strong for a deep, prolonged balance sheet recession. An income statement recession (affecting revenues and profits without severe balance sheet deterioration) represents the more likely scenario if we do enter a recession.

Should hard economic data finally converge with deteriorating soft data indicators, the Federal Reserve will likely adjust policy quickly.

American Business Resilience

The impact of tariffs varies dramatically across sectors, industries, and individual firms, depending on products, business models, and supply chain structures. However, one consistent theme emerges: American businesses have repeatedly demonstrated remarkable resilience and ingenuity.

As we've maintained, once companies understand the rules of the game, they adapt and continue pursuing profitable operations. We have little reason to doubt this pattern will repeat—whether we face an income statement recession, anemic growth, or a more benign economic cooling.

American business dynamism remains a powerful force. Don't underestimate it, even as we navigate these challenging economic waters.