The Economy is Falling, Or Stagnating, Or Worse

Chicken Little was sure that the sky was falling. We often use that fable as a metaphor for people who get upset and over reactive over nothing. There certainly have been any number of Chicken Littles screaming and squaking all over the American barnyard the past several years. People warning about dangers that don’t exist is exactly how Felonioius Punk got re-elected. There’s a price for all that hyper-overdramatization of everything, though. Who can tell which dangers are real?

For a large number of economists, the word of the day is ‘stagflation,’ a combination of inflation of prices and stagnate economic growth. In simple terms, stagflation is when the economy is stuck in a rut (stagnant), people are losing jobs (high unemployment), and the cost of living is going up quickly (high inflation) – all at the same time.

The most notable period of stagflation was during the 1970s. This was largely triggered by factors like the oil price shocks (OPEC oil embargo), which drastically increased energy costs (driving inflation) while also disrupting production and slowing economic activity (causing stagnation).

While announcing this stagflation, however, economists are being careful to say that this period shouldn’t be as bad as the 70s. They don’t expect the inflation numbers to balloon as they did in 1974 because, for the moment, there isn’t a driver likely to cause a similar spike in prices. While Punks tariffs could cause a similar spike, the on-again/off-again nature of the threats is keeping inflation from soaring. Should the President’s tactics change, everyone in the world could feel the negative effects.

That’s not necessarily the view of corporate CFOs across the country, though. The latest CNBC CFO Council quarterly survey for Q1 2025 shows that the folks who have to balance the budgets at major corporations are a little more pessimistic than outside economists. In fact, they’ll go so far as to predict a recession before the end of the year. Again, they’re some hedging. Any recession this year “may not be as bad as 2008.”

“Too chaotic for business to navigate effectively” was how one CFO respondent framed their view of Punk’s second term to date. 
 
“Extreme”; “Disruptive”; “Aggressive”; “A wild ride,” were some of the other ways CFOs portrayed their current view. 

Regardless of which adjectives are used, 60% of those responding are certain of a recession in 2025. Add another 15% for those who expect a recession in the first quarter of 2026. In recent weeks, recession has become a more popular default setting in the market for the first time since the Fed began aggressively raising interest rates to beat back runaway inflation in March 2022. The odds of recession are running as high as 50% at some financial firms, new “recession watch” indicators are being created, and other recent CNBC surveying, among money managers and economists, shows a spike in recession fears.

It seems that a large number of Americans tend to agree. Consumer confidence slid 7.2 points this month to a reading of 92.9, the Conference Board said Tuesday in its latest survey, reaching its lowest level since January 2021 and extending a decline that began in December after the US presidential election. March’s decline was similar to February’s, underscoring the growing pessimism among US consumers.

What are we all worried about? Americans’ expectations “for income, business, and labor market conditions” in the coming year fell sharply this month, the survey showed, declining 9.6 points to 65.2, the lowest level in 12 years. Meanwhile, the share of respondents expecting a recession in the next 12 months held steady in March at a nine-month high.

Stephen Miran, chair of Punk’s Council of Economic Advisers, said he isn’t concerned by the drop in consumer confidence. “Folks often let their political views influence their views of the economy, which tends to manifest in the confidence data,” Miran said Tuesday. Of course, one expects the administration to spin away from talks of recession.

There have been some signs of economic weakness already, even before Punk’s policies demonstrate any shifts in the economy. A real-time forecast of economic growth by the Atlanta Fed shows the economy contracting in the current quarter, slowing sharply from late last year. That’s largely due to the effects of unusually harsh cold weather in January on consumer spending and industrial activity.

The Fed is also getting a concerning signal from the recent run-up in Americans’ expectations for inflation in the short run and in the long run. After the Fed’s latest monetary policy meeting earlier this month, Powell said long-run inflation expectations remain “mostly well anchored.”

A great deal of what does happen with the economy still depends on when/if Punk’s tariff threats take effect. The current back-and-forth chaos is keeping markets on edge and creating a general atmosphere of distrust across a large number of potentially effected industries. Both the timing and the severity of any tariffs could cause markets to plummet and inflation to skyrocket.

The problem with all this speculation is that there’s no way to know if any of it is going to happen. Perhaps the most significant danger is that all the prognostication could become a self-fulfilling prophecy. If enough speculators bet heavily against an asset (e.g., a company’s stock, a currency), it can signal weakness to the broader market. This can erode confidence among regular investors, causing them to sell, which then drives the price down, validating the speculators’ initial negative bet. The speculation itself helps create the negative outcome it predicted.

Large-scale negative speculation can dramatically increase market volatility. Heavy selling pressure can lead to rapid price drops, triggering panic selling among less informed or risk-averse investors. This instability can disrupt normal market functioning and make planning difficult for businesses and individuals.

The primary danger of negative economic speculation lies in its potential to create or worsen negative outcomes through destabilized markets and institutions, harm viable entities, and increase overall systemic risk, often divorced from underlying economic fundamentals. While it can sometimes serve a corrective function, its potential for destructive impact, especially when large-scale or manipulative, is a significant concern for regulators and policymakers.

How should we all respond to the noise in the barnyard? Buckle up, buttercup. If enough feathers start flying, it may look as if a storm struck. At the same time, people who are busy screaming about doom and worry often don’t see the actual storm when it approaches.

Plan for the worst, hope for the best, and make sure you’re wearing clean underwear.