Neil Dutta, Head of Economics at Renaissance Macro and a regular columnist on markets and policy, didn’t call a recession in 2022—while nearly everyone else did. Most economists were sounding alarms after two quarters of negative GDP growth in the US. But Dutta held back, pointing instead to resilient labour markets, strong household savings, and buoyant housing stocks. No recession came.
Now, he’s changed his mind.
“This time, it’s worse,” Dutta says plainly. “There are no excess savings. The labour market is visibly softening. And those same housing stocks that were outperforming? They’ve rolled over.” His reasoning is not exactly a deviation from earlier frameworks. Rather, it’s the same checklist—just now all the ticks are pointing in the wrong direction.
Gone are the disposable income buffers. Real wages have stalled. State and local governments are dealing with budget hangovers after treating COVID-era stimulus like a permanent raise. “They spent like it would never end. Now it has,” he says.
The warning signs are everywhere. Builders, for example, are sitting on the largest pile of completed-but-unsold homes since the financial crisis. “That’s going to hurt residential investment,” he notes, and it’s already showing up in inventory builds and weak construction employment data.
If Dutta sounds measured, he’s also unapologetically blunt. “You can’t spell liberation without obliteration,” he quips, referring to the recent tariff announcements. A surge in imports ahead of expected duties has caused a cascade through trade data. “The damage is already done,” he adds. “The ships are on the water. You can’t turn this around mid-voyage.”
He doesn’t see this downturn as a sharp collapse like in 2008 or 2020. Instead, he compares it to the early 2000s—drawn out, confidence-sapping, and persistent. “It’s shock after shock after shock,” he says. “And unlike COVID or the GFC, this time it’s the business community that’s demoralised, not consumers.”
That might sound surprising, but Dutta lays it out clearly. “We had a linear slowdown. Then tariffs made it non-linear. Then the administration softened its stance, and now we’re kind of back to linear again. But confidence has already been bruised.”
Surveys and sentiment are echoing the downturn. Capital spending intentions, a key forward-looking indicator Dutta watches, have collapsed. “Businesses were preparing to gear up. They’ve shelved plans. That’s the most immediate impact we’re seeing from trade tensions.”
And what about the fiscal picture? Surely a 7% of GDP deficit is cushioning things?
Dutta shakes his head. “People misunderstand how this works. It’s the change in deficit that drives GDP. If the deficit’s flat, the cyclical boost is zero.” Translation: the government might be borrowing a lot, but it’s not helping growth anymore.
So yes, Dutta sees recession, but he doesn’t expect a deep one. “Household balance sheets aren’t blown out. There are no major private sector excesses. But it’ll be long. Shallow and long.”
He sees uncanny parallels between the current backdrop and the market vibes from 2001–2003. “Back then we had 9/11, Enron, Iraq war build-up. Now? We’ve got tariff wars, political chaos, and trust eroding between business and government.”
He believes the Fed is underestimating all this. Inflation concerns, according to Dutta, are being misread. “Look at wage growth—it’s running under 3% annualised. Real incomes are falling. Tariffs may lift prices, but households don’t have room in their budgets. If they pay more for goods, they’ll spend less on services. That’s disinflationary.”
The energy sector offers more clues. Oil prices have fallen, yet the public hasn’t quite felt it—yet. “Give it a bit. Gas prices drive inflation expectations more than anything. If petrol gets cheaper, expectations will fall too. That undercuts the Fed’s hawkish rationale.”
He also sees some corporate behaviour confirming the downturn: “Companies are cutting guidance. They’re giving alternate scenarios in earnings calls. That means they’re not investing. If they’re not investing, they’re not hiring.”
What’s keeping the Fed from acting? Dutta thinks they’ve conditioned themselves to be late. “They’re still burnt from the last cycle. But this isn’t about being ahead or behind the curve anymore—it’s about doing the job.”
He credits Governor Chris Waller with the clearest take: treat tariffs as temporary noise. Dutta agrees. “Tariffs raise prices, yes. But they also lower volumes. Consumers simply can’t afford everything. The maths doesn’t work.”
And yet, despite his forecast, Dutta doesn’t see a bond market revolt. “People talk about selling America. But we’re still the deepest capital market. If there’s a recession, Treasuries will be bid. That’s still the play.”
So what should the Fed do?
“They should be teeing up a cut for June,” he says. “They won’t. But they should.” He expects four cuts this year starting in July. One might even be a 50-basis-point move.
He doesn’t think the Fed needs to be scared of presidential pressure. “The best way to maintain independence? Do your job well. If they ignore the data just to appear tough, they’ll attract more attention, not less.”
And the job market? “That’s the clearest signal,” he says. “Forget vibes. Look at the Conference Board’s labour differential. Look at construction and manufacturing. Employment is weakening. The light on the job market is definitely dimming.”
If Dutta’s right, a shallow recession lies ahead. One not driven by a crash in banks or a virus, but by erosion—of confidence, spending, hiring, and investment. “It’s death by a thousand cuts,” he warns. “And it’s already started.”
Quotes and insights are from Neil Dutta’s interview on the Forward Guidance podcast, May 2025
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📉 Economist Neil Dutta predicts "shallow but long" US recession as labour markets soften & #tariffs bite. 💸 Cites weak business investment & fading consumer buffers. 🏦 Urges Fed rate cuts by July despite inflation fears. #TheIndianSun #TariffWar https://t.co/QwSmfhkB1r
— The Indian Sun (@The_Indian_Sun) May 8, 2025
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