Tonight, President Trump gives his big speech to Congress (our preview here).

But, as the President decides new tariffs, it's time to take stock of the economy. The smartest businesspeople we talk to seem to all be expecting, if not a recession, then definitely an economic softening. So we think it's time to review the evidence, peer into our crystall ball, and see what's going on. If the US enters a recession, the political calculus surrounding the budget and the reconciliation bill(s) will change significantly.

First, let's look a the labor market. By traditional measures, the job market is robust. The unemployment rate hovered around 3.7% in late 2023 – near a 50-year low – and labor force participation inched up to 62.6% (still shy of its pre-pandemic ~63.3%), according to BLS figures.

But on the ground, workers and businesses are experiencing something unusual. Hiring has slowed to a crawl—roughly to the pace seen after the Great Recession—despite low unemployment. At the same time, far fewer employees are quitting: the rate of voluntary job exits has fallen by about one-third from its 2022 peak, down to the lowest level in a decade. In other words, and this seems to be a nearly unprecedented phenomenon: the labor market is “frozen”. Workers are clinging to their jobs, while employers are reluctant to add new positions, especially in white-collar fields, as a very interesting piece in The Atlantic pointed out.

This phenomenon has concrete effects. With less job-hopping, wage growth has cooled. After a burst of post-pandemic raises, paychecks are now barely keeping ahead of prices. Median weekly earnings did rise about 5.5% in 2023, finally outpacing inflation of 4.1%. But that translated to only a 1.4% real wage gain – essentially flat purchasing power for the average worker after the prior inflation surge. Men’s median wages didn’t rise at all in real terms in 2023 Stagnant real pay and fewer opportunities to move up are squeezing workers’ wallets and confidence. Notably, prime-age labor force participation (workers 25–54) has recovered strongly – particularly for women – yet businesses still report labor shortages in industries like health care and hospitality.

Meanwhile, we are in the aftermath of a long campaign by the Federal Reserve to get inflation under control by raising interest rates—up to a 5.25–5.50% range, the highest in over two decades, according to Reuters. While this is surely necessary, by definition, it is depressing demand. Consumers, the engine of the American economy, have grown more cautious, shifting away from discretionary purchases as the post-pandemic spending spree fades.

As a result, business investment is also struggling. Manufacturing output plateaued after two years of big post-COVID gains. Banks, for their part, have tightened lending standards, and loan demand has softened. In essence, the Fed’s medicine is taking effect: credit is pricier and harder to get, curtailing the kind of exuberant spending that fuels inflation. Fed Chair Jerome Powell has signaled that the central bank won’t rush to cut rates until it’s confident inflation is vanquished.

How about housing, another traditional economic engine for the US economy? Because so many homeowners locked in ultra-low 3% mortgages in 2020–21, housing supply has dried up—few are willing to sell and give up their cheap loans. The Fed’s own regional surveys noted that despite buyer interest, home sales are severely constrained by low inventory. This stalemate has driven existing-home sales to the lowest levels in over a decade, as would-be buyers and sellers sit on the sidelines. Meanwhile, rents have surged. By early 2024, rents in professionally managed apartments were 26% higher than in early 2020, worsening the squeeze on working-class households. According to a Harvard housing report, a record 50% of U.S. renters now spend over 30% of their income on housing costs. For millions of Americans, the dream of homeownership is on hold, and a disproportionate share of their paycheck is going to landlords or inflated mortgage payments.

This housing freeze cuts both ways for the economy. On one hand, it’s a significant drag on growth – fewer home sales mean less spending on renovations, appliances, moving services, and construction employment. (Residential investment has been in a slump and will likely remain subdued into 2025 absent a big drop in rates.) On the other hand, the housing market’s tight conditions have so far prevented a 2008-style crash: prices remain high because supply is so limited, cushioning homeowners’ equity. Any future Fed rate cuts could thaw this market quickly, unleashing pent-up demand. For now, though, housing stands as the sector most clearly in recessionary territory already.

In other words: underneath rosy-looking high-level figures—inflation down, unemployment low, GDP growth okay—the US economy is showing many signs of fragility, and it feels like any small things could tip things over into a dangerous area. The American consumer is compressed by low wage growth and high housing costs, even as high interest rates deter investment, and housing is frozen. Most forecasters still think a recession in 2025 is unlikely, but we wouldn't be so sure.

This may be especially true if President Trump goes through with his tariff threats. There's perhaps no view that Donald J. Trump has expressed more forcefully and more consistently, going back to the 1980s, so some forty-odd years, than his belief that tariffs are good for the American economy. There's a case to be made that tariffs would help the American economy reindustrialize over the long run.

Policy News You Need To Know

#LGBT — Astonishingly, all Senate Democrats voted against cloture on the Protection of Women and Girls in Sports bill.

#LGBT — Speaking of: UC Davis is planning a $5 million renovation project to remove the women’s and men’s sex-segregated locker rooms to create one big 'Universal Locker Room' that is 'inclusive of members of all gender identities.'" Haven't they heard about the vibe shift? It's 2025.

#FamilyPolicy — Heritage has produced a deep dive on the state of the American family and concludes that pro-family policy is needed.

#Reg — Interesting: AAF's Shuting Pomerleau is skeptical about the new EO directing the EPA to "challenge and potentially rescind its 2009 endangerment finding, which concluded that six types of greenhouse gas (GHG) emissions pose harm to public health and welfare, and which serves as the legal basis for the agency’s regulations on GHG emissions." This was an egregious power grab that went beyond the EPA's legal mandate. But, warns Pomerleau, "repealing the endangerment finding would likely create chaos for U.S. climate policy, as it would make it much easier to repeal the existing EPA GHG regulations, which would subject EPA to legal challenges and produce increasing policy uncertainty for businesses." These seem like surmountable obstacles. But, not ones that should be ignored.

#Healthcare — Very good point from Douglas Holtz-Eakin, using children's hospitals to compare the US system with single-payer healthcare. Apart from the moral weight of children's health care, this is a good comparision because both types of systems prioritize children's healthcare. Holtz-Eakin finds that American children's hospitals are much better than their peers.

#Immigration — While deportations are taking longer than expected to ramp up, illegal border crossings have declined precipitously.

#Immigration — Very enlightening House Judiciary GOP report on the Biden-Harris Administration's abuse of TPS to enact what they accurately call "de facto mass amnesty."

#Law — EPPC's newest Fellow Michael A. Fragoso with a piece at City Journal arguing for removing the ABA from the judicial nominating process. He convincingly shows that the ABA has become a partisan organization.

#Budget #Pentagon — Mike Pence weighs in on the reconciliation debate with a call to increase defense spending.

#Justice — Ben Shapiro has launched a petition calling for President Trump to pardon Derek Chauvin. The President should obviously do this, as evidence has shown that he used approved techniques to restrain George Floyd who had a lethal dose of fentanyl in his system and pre-existing conditions that led to his death. Chauvin is undeniably innocent of murder. Chauvin was stabbed 22 times in prison by a gang leader who was also a BLM activist.