Why the recession risks are growing/All that glitters can also be silver/Retail slowdown/Overseas

I've argued for a while now that the US economy stands on just 3 pillars. One being upper income spending, particularly on travel/leisure, and benefiting from higher stock and home prices. Second, anything related to the AI CapEx spend and Gen AI buildout, whether via chips, servers, data center buildouts, electricity grid, etc...Third, government spending with a budget deficit as a % of GDP near 7%, more than double where it should be. This fiscal blow out has also been a major factor in corporate earnings growth and profit margin expansion over the last few years. IRA, Chips Act, healthcare, transfer payments, etc...all flow dollars into the private sector.

Weakness continues to be seen with manufacturing, whose recession is now past 2 years and tariffs are only going to make this worse if 2018-2019 is any precedent. The pace of existing home sales remains around 30 year lows and thus is a drag on anything related to housing turnover. Lower to middle income spenders are clearly seeking value and spending less as we've heard a million times from a variety of retailers and Lululemon, Winnebago and Oxford Industries reminded us again last night. Capital spending ex AI has been essentially flat lining for the past 2 years. Global trade, outside of the pull forward ahead of tariffs, has been muted. And, the all in U6 unemployment rate is now at the highest level since October 2021 as seen with the February BLS data.

Now, there is a clear attempt to both cut outright federal government spending in certain areas, particularly with personnel and to slow the pace of spend elsewhere such as in defense and Medicaid. I applaud this for the long term but there is no avoiding the short term negative impact. With the GenAI ecosystem CapEx, risks are only going to grow that the pace of spend will slow here too, especially post the DeepSeek news and the stocks involved in this space clearly reflect the worries. Lastly, the stock market for the first time in a few years is experiencing some shakier legs and if this continues, if the pullback becomes something more, especially if the AI tech trade continues to falter, you can be sure that upper income spending will slow down. You cannot separate asset prices and high end consumer spend with about 50% of the latter coming from about 10% of the upper income earners.

Bottom line, the rising risk of recession is real and unless something replaces the above economic strengths, I don't see how we can't be worried and on the lookout.