Key Economic Trends: April 2025 Macroeconomic Update

During our April 2025 Market Pulse webinar, our panelists discussed trends, challenges, and opportunities related to small business. 

To open the conversation, AC Cutts & Associates President and Chief Economist Dr. Amy Crews Cutts shared a macroeconomic update, dissecting the latest market changes and trends to watch, from consumer sentiment to the labor market.

Consumer Sentiment

Consumer sentiment plays a pivotal role in driving spending and overall economic activity. Closely tied to stock market fluctuations, it's often gauged through surveys like the University of Michigan's Consumer Sentiment Index and the Conference Board’s Consumer Confidence Index. These surveys provide a pulse on how consumers feel about the economy.

However, interpreting month-to-month swings in these indices requires caution. Consumer sentiment can be influenced by emotional factors unrelated to the economy. Sustained trends, whether positive or negative, are more telling. For instance, sustained declines in the S&P 500 often lead to corresponding drops in consumer sentiment. This is due to various reasons, including concerns about retirement savings, job security, and potential pay cuts. Therefore, while consumer sentiment serves as a bellwether, it’s most meaningful when observing prolonged activity.

Wealth Effect & Consumer Spending

The wealth effect highlights how changes in wealth impact consumer spending. It’s a crucial factor in understanding aggregate demand. Three main elements are currently influencing it: the income effect of prices, or inflation, the wealth effect, and the savings effect.

As asset values decline, such as those in the stock market, consumers feel less secure and tend to cut spending. Year-to-date, we’ve seen significant hits to wealth, although there has been some bounce back. Economists estimate a 3% decrease in consumer spending for every 1% drop in stock market value. Additionally, worries about economic downturns and layoffs lead to increased savings and further reduced spending, otherwise known as the savings effect.

Consumers may have accelerated purchases ahead of anticipated tariffs, impacting near-term demand. For example, some economists believe that consumers are buying cars ahead of anticipated price increases, which may impact the available inventory for the customary Memorial Day auto sales. Businesses, too, are affected. They might delay new projects, hiring, or expansion plans, further impacting economic growth.

Economic Downturn Risks

But everyone really wants to know: Are we headed for a recession? According to the April Blue Chip Economic Indicators Survey, most economists are optimistic, projecting around 1.5% real GDP growth for 2025 and positive outlook for 2026. The most optimistic respondents anticipate 2-2.2% growth, while more cautious ones forecast 0.6% growth, a significant slowdown from 2024’s 2.8%.

However, Amy believes a recession is imminent. Signs of stress are emerging in surveys like the National Association of Credit Management (NACM) Credit Managers Index and data from the National Federation of Independent Businesses, and she projects negative GDP changes for 2025 and 2026. Inflation expectations vary among economists as well, with some predicting only a small increase from tariffs and others, such as Amy, anticipating pass-throughs and supply chain disruptions.

High-frequency data, meaning data that is done on a daily or weekly basis, provides mixed signals. The Chicago Board of Exchange Volatility Index (VIX) spiked around tariff announcements but has since decreased, though it remains slightly above average. The Weekly Economic Index suggests 2.5% economic growth, while the Atlanta Fed reported negative growth for the first quarter. The St. Louis Fed Financial Stress Index showed a slight spike but remains low, indicating no immediate recession.

The Labor Market

The labor market appears strong for now, but strength before a recession is typical. Part of the definition of a recession is an increase in layoffs and the unemployment rate. Currently, monthly average unemployment rates remain historically low through March. However, data may not yet reflect layoffs from federal agencies, as many are still being paid or ineligible for unemployment. Weekly and monthly employment data show gradual decreases in job additions but no signs of distress yet. It’s crucial to monitor labor market trends closely, as changes here often signal broader economic shifts.

Small Business

Small business owners have become less optimistic. The National Federation of Independent Businesses’ Small Business Economic Trends Survey shows declines in optimism regarding business expansion and general business conditions. While sentiment is better than in some past periods, it has dropped from its peak post-election following policy changes. Uncertainty is particularly challenging for small businesses, causing stress and hesitation.

Credit Managers’ Sentiment

In its Credit Managers Index, the NACM surveys accounts receivable managers to gauge trade credit conditions. While current data doesn’t indicate significant negative impacts from recent policy changes, anecdotal evidence from the survey’s respondents suggests underlying stress. Reports of businesses closing without bankruptcy declarations, additional late payments, and increased collection efforts indicate potential issues. Overall, while credit managers still see growth, caution is warranted.

The economic landscape continues to be marked by uncertainty. While many economists remain optimistic, emerging data and sentiment surveys suggest potential challenges. Consistent monitoring is essential for staying agile and being prepared to make informed decisions and adapt to evolving conditions.