Is the U.S. economy headed for recession?

Investing.com -- Despite its forecasted 1.9% annualized contraction in first-quarter GDP, Capital Economics does not expect the U.S. economy to enter a full-blown recession, anticipating a rebound in the second quarter.

“The principal reason why we are now forecasting a contraction in the current quarter is the revelation in the latest advance economic indicators report, released last Friday, that real goods imports increased by more than 10% m/m in January,” the analysts wrote. 

The firm explained that this surge was driven by businesses front-running new tariffs, but there has been no corresponding rise in inventories, which typically offsets higher imports. 

“Even if we assume imports fall back in February, net external demand will still subtract around 3.5% points from overall GDP growth.”

Consumer spending is also showing signs of weakness. “The 0.5% m/m decline in real consumption in January was partly due to the unseasonably severe winter weather,” but early data suggests that spending did not rebound in February. 

The Chicago Fed CARTS data is said to indicate a 0.8% monthly decline in non-auto core retail sales, on top of a 0.4% drop in January.

Rather than accelerating purchases ahead of expected price hikes, “consumers are instead pulling in their horns and opting to boost precautionary saving ahead of what they expect to be another damaging episode of high inflation.”

On the bright side, business confidence remains resilient, with “small business optimism still markedly above its pre-election level.” 

While Capital Economics does not currently expect a recession, they caution that “stranger things have happened,” especially as policy uncertainty continues to unfold.