On the lookout for ‘brown shoots’ in the US economy

Key takeaways

“Brown shoots”

Some signs that the economy is beginning to wilt, what I call brown shoots, have begun to appear.

Concern from companies

In recent earnings calls, Delta Airlines, Dollar General, Macy’s, and Kontoor have expressed concerns about consumers.

Some good news

Improving consumer sentiment and stock performance in Europe is reflecting positive surprises and rising potential.

Back in the spring and summer of 2009, I remember spending much of my time looking for what we called “green shoots” — signs that the economy, which was in a deep recession, was beginning to recover. I desperately searched hoping to find them. (We did and a slow but lengthy recovery followed.) Now I’m looking for “brown shoots” — signs that the economy is beginning to wilt. This time it isn’t a desperate search but rather a reluctant one, as I’m hoping not to find those brown shoots. We know, however, that recessions are caused by policy mistakes, so we must watch vigilantly for them.

Some brown shoots are appearing:

• The Federal Reserve Bank of Atlanta’s (Fed) GDPNow barometer for first-quarter growth remains in negative territory, with an estimate of -2.4% GDP growth.¹ This could change significantly, however, since we’ll have substantial data in the coming weeks which will cause revisions to the forecast.
• US consumer sentiment continues to drop. The preliminary reading of University of Michigan consumer sentiment for March fell to 57.9, a significant decline from February and the lowest level since November 2022. The expectations subindex fell to 54.2, a 15.3% decline from the previous month and a 30% drop from one year ago.² This is the lowest level since July 2022. This follows similar results from the most recent Conference Board Consumer Confidence Index.
• The NFIB Small Business Optimism Index has declined — although it’s still above long-term historical levels.³
• US retail sales for February were lower than expected, and there was a substantial downward revision to US retail sales for January.⁴

Most concerning, perhaps, is what we’re hearing from companies:

• Delta Airlines warned in a regulatory filing last week, “The outlook has been impacted by the recent reduction in consumer and corporate confidence caused by increased macro uncertainty, driving softness in domestic demand.”⁵
• Kontoor Brands CEO Scott Baxter said about consumers in an earnings call, “If you just put yourself in their seat, they’re worried about work. They’re worried about the businesses that they’re in. Are those going to be impacted by some of the layoffs, the tariffs, the current situation right now? Any time the consumer is feeling a little bit under attack like that, they get very conservative. And I think that we are in this country right now seeing that conservatism from the consumer because of their worry.”⁶
• Dollar General, a large retail store chain whose customers are largely low income households, shared that its customer base is struggling because of high inflation and economic uncertainty: “Many of our customers report they only have enough money for basic essentials, with some noting that they have had to sacrifice even on the necessities.”⁷
• Macy’s CEO Tony Spring warned on his recent earnings call that it’s not just lower income households that are coming under pressure: “I think the affluent customer that’s shopping Macy’s is just as uncertain and as confused and concerned by what’s transpiring.”⁸ Affluent consumers in the US are likely to be reducing spending at least partially because of the substantial stock market drop, which has historically impacted perceptions of net worth (the “wealth effect”) and negatively impacted consumer spending.

Market corrections

While all eyes have been on the S&P 500 Index, which briefly fell into correction territory last week, the Russell 2000 Index has quietly fallen much further from its peak. As of Friday, the Russell 2000 Index is down more than 16% from its peak in November 2024, getting dangerously close to bear market territory.⁹ Small-cap stocks are typically far more sensitive to the economic cycle than large-cap stocks, so we should be pay attention to this very significant drop and the message it’s sending.

Rising recession probability

Recession is not a fait accompli, as I’ve said before. While the probability of a recession is rising every day and more brown shoots are appearing, we’re far from a contraction becoming a reality. I don’t see a sea of brown shoots right now — far from it. I think a recession can still be prevented by abandoning policies that are negative for the economy (as I’ve articulated in previous articles).

Some good news

The good news is that change can create opportunity, and sizeable change can create a sizeable opportunity. I’ve talked about the fiscal impulse getting stronger in Europe as countries ramp up defense spending. We’re even seeing an improvement in consumer sentiment in Europe as the Eurozone Economic Sentiment Indicator rose to 96.3 in February, the highest level in five months.¹⁰ Investor expectations for the next six months rose substantially, which is very encouraging.¹¹ German economic sentiment is also getting better and is poised to improve further given the results of the federal election in February.¹² I would expect positive surprises and improving potential to continue to impact European stock performance. This is a valuable reminder of the importance of diversification.

Geopolitical and economic change may also be creating opportunities in other asset classes, such as gold. It crossed the critical $3,000 per ounce level last week¹³ and appears poised to rise further, in my view, as uncertainty has become one of the few certainties in this environment.

Looking ahead

The most important release this week, from my perspective, will be the Federal Open Market Committee (FOMC) “dot plot,” which will give us insight into FOMC members’ expectations for the US economy and the fed funds rate. The Fed seems committed to sitting on its hands for the time being, but the dot plot will force them to “guesstimate” whether they’ll cut rates this year and by how much. With so much up in the air, it’ll be interesting to see their expectations. I’m sticking with my view that we’ll get several rate cuts this year. This is important because, with such strong fiscal policy headwinds, it seems one of the few areas of hope for positive surprise in the US will come from a Fed that provides some easing this year.

The Bank of Japan (BOJ) meets this week, on the heels of shunto negotiations, which indicate 2025 will be another year of significant wage growth. Long-maturity government bond yields have risen, suggesting rising odds the BoJ will hike rates at this meeting. If it does raise rates, I think it’ll be viewed positively as another vote of confidence in the Japanese economy. The Bank of England and the Swiss National Bank also meet this week, and it’ll be helpful to get their assessments of their economies and the global economy.

The week ahead

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Originally Posted on March 18, 2025

On the lookout for ‘brown shoots’ in the US economy by Invesco US

Footnotes

1. Source: Atlanta Fed GDPNow, as of March 6, 2025.
2. Source: University of Michigan Survey of Consumers, March 14, 2025.
3. Source: NFIB Small Business Optimism Index, March 11, 2025.
4. Source: US Census Bureau, March 17, 2025.
5. Source: “Delta cuts its once-rosy outlook. Here’s what’s worrying the airline,” Morningstar, March 10, 2025.
6. Source: “Consumers ‘Under Attack’ Are Pulling Back, Lee Maker Says,” Bloomberg L.P., February 25, 2025.
7. Source: “Wildly popular US discount chain with 20,000 stores announces mass closures as retail apocalypse spreads,” Daily Mail, March 14, 2025.
8. Source: “Macy’s sounds yet another alarm on consumer spending,” TheStreet, March 7, 2025.
9. Source: Bloomberg L.P., as of March 14, 2025.
10. Source: European Commission, February 28, 2025.
11. Source: Sentix GmbH, as of March 10, 2025.
12. Source: ZEW Indicator of Economic Sentiment, a sentiment indicator created out of the monthly ZEW Financial Market Survey, an aggregation of the sentiments of approximately 350 economists and analysts on the economic future of Germany in the medium term, February 18, 2025.
13. Source: Bloomberg L.P., as of March 14, 2025