The Economy is Weaker than is Generally Understood
Weekly Investment Update | By Brian Schreiner
On Sunday morning, Adam Taggart of Thoughtful Money posted an interview with the great Lacy Hunt. Now, 82 years old, Dr. Hunt has had a distinguished career serving as Chief U.S. Economist for the HSBC Group, Executive Vice President and Chief Economist at Fidelity Bank, and Vice President for Monetary Economics at Chase Econometrics Associates, Inc. He also served as Senior Economist for the Federal Reserve Bank of Dallas, and is author of two books on investing and financial forecasting.
In recent weeks, the Wall Street consensus has downgraded the probability of a U.S. recession this year after a de-escalation of trade tensions and expectations that the labor market and consumer spending will remain strong. Betting markets have reflected this. The odds of a recession in 2025 on Polymarket have declined from around 66% on April 6 to 30% today.
Dr. Hunt has a contrarian view and believes that there is more than a 50% chance of recession. He said, “The economy is far weaker than is generally understood. I think the recession risks are better than 50/50 and I believe that's being confirmed now increasingly by the hard data and that the economy has a very difficult wall here ahead of it.”
Thoughtful Money host, Adam Taggart interviewed Dr. Lacy Hunt on June 1, 2025
Dr. Hunt explained his forecast in detail, saying, “The economy is now exhibiting increasing signs of pain and there's no real stimulus coming in to offset it at least for the near term, as far as I can see.”
Revised Q1 data shows that both gross domestic income (GDI) and gross national product (GDP) declined in a meaningful way.
The most important sectors of the economy are contracting.
The share of corporate profits of total GDP fell sharply in Q1.
Consumer spending was actually weaker in both the goods and service sector.
Residential and non-residential fixed investment declined in Q1.
The Bureau of Economic Analysis is showing that consumer expenditures were far weaker in the first quarter than originally reported – a huge downward revision.
The consumer is under pressure. Consumer loan rates are unreasonable and unaffordable. We’ve seen serious delinquency rates on credit cards, auto loans, mortgages and student loans.
In Q1, there was a massive increase due to “buy-in-advance,” a huge build up in inventories and firms now have to move this inventory, which is going to present a problem.
The strength was in AI data centers and industrial equipment. Nine months of aircraft deliveries occurred in Q1 due to Boeing labor strikes late last year.
This year, we are seeing both international trade and international capital flows into the U.S. decline, which is having a negative impact on the economy.
Although unemployment claims are relatively low on a historical basis, we are continuing to see an upward creep in both initial and continuing unemployment claims.
The stock market has reacted positively to recent earnings reports because they beat Wall Street forecasts, but numbers from the Bureau of Economic Analysis for corporate profits are more reliable and reveal a significant fall in Q1 earnings.
Monetary policy is too restrictive. “In my opinion, there’s no reason to be data-dependent. In this environment, if the tariffs remain in effect, their ultimate impact will be deflationary, not inflationary. Moreover, it comes at a time when money supply is contracting.”
Massive debt levels will remain a tremendous obstacle and as the debt matures it must be rolled over at a higher interest expense and the federal debt is going to continue to rise and become more important; it's a dead weight drag on the economy.
Dr. Hunt went on to explain why monetary policy is too restrictive and why the Fed’s wait-and-see approach is a mistake. He also explained why The Big Beautiful Bill, in its current form, is not a tax cut and why it won’t have much of an impact in terms of the budget deficit as a percentage of GDP. Whatever mild boost to GDP that may come from the Bill will likely be offset by deteriorating capital flows and won’t address the massive debt overhang.
If you’re interested in the full depth of Hunt’s analysis, listen to the whole interview. It’s a great lesson in macro economics covering many important concepts influencing the economy and financial markets. α
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Interesting things I came across this week…
Q2 GDP Forecasts from Goldman Sachs, BofA, Atlanta Fed (CalculatedRISK)
Pending Home Sales Declined 6.3% in April (National Assoc of Realtors)
London Home Prices are Declining (The Daily Spark)
How Scotch Whisky Came To Be (Zerohedge / The Epoch Times)
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