When it comes to the economy, it’s better to heed what consumers and businesses do rather than what they say.

Economic survey data was already showing meaningful signs of deterioration during the first quarter of 2025, a trend that accelerated in April. For example, the Conference Board’s Consumer Confidence survey had already dropped by 18.9 points from its November post-election peak through March, before April’s 7.9 decline brought the measure back to the 2020 pandemic lows. Deteriorations like this typically only occur during recessions, meaning the degree to which weaker “soft” survey measures translate into actual “hard” data in the coming months will be crucial in determining the health of the U.S. economy.

There is some debate about whether the hard data will ultimately follow the soft data, however. This primarily stems from what occurred in 2022, when soft data weakened precipitously in the wake of the Russian invasion of Ukraine, the regional bank crisis and elevated inflation, while the hard data largely held up. This period came to be known as the “vibecession.” Even though many Americans didn’t feel great about the health of the economy, their continued strength on the back of a healthy labor market, prior fiscal support and residual pandemic savings powered the economy forward.

In 2025, the probability of consumer strength overpowering trade-related headwinds appears lower, in our view. While the labor market remains healthy with monthly job creation averaging 144k so far in 2025, this pales in comparison to the red-hot labor market of 2022 when monthly job creation averaged 380k (and 603k in 2021). Further cooling in the labor market could prove problematic for the economy given the fact that labor income represents the majority of spending power for most Americans.

In the coming months, investor attention will be focused on whether hard data is rolling over. ISM New Orders, a snapshot of future manufacturing activity, have quickly deteriorated over the past few months as the trade war has escalated. While it is too soon for hard data indicators to show trade-related weakness, at least one — corporate profit margins — was seeing headwinds even before Liberation Day.

The deterioration in profit margins reflects events that unfolded prior to the escalation of the trade war. Inflation, and thus the pricing power of corporations, has cooled more rapidly than wages and other key input costs, crimping profits. This has driven profit margins down from record levels. In the absence of a trade war, this dynamic would be less concerning. However, the prospect of additional strain on margins in the coming months from higher tariffs appears likely. This is worrying because as margins contract and profits erode, corporate management teams are often eventually forced to lay off workers, starting or amplifying a recessionary feedback loop as consumers pull back given the loss of income.

Given this, we see initial jobless claims as the single most important economic indicator to watch in determining the path of the economy. Claims have held up well in the weeks following Liberation Day, and we believe the late-April jump is a seasonal adjustment issue related to the timing of spring break in New York that will likely reverse in early May. However, slipping profit margins means there is less of a buffer should the labor market weaken or demand slow in the coming months.

This leads us to believe that the current risk-reward tradeoff facing both the economy and financial markets skews to the downside. A positive change in trade policy or a renewed focus from the administration on its supply-side agenda (deregulation, tax cuts/fiscal support) could skew the outlook more favorably. However, prompt action is likely needed to counteract the negative (and building) effects of elevated uncertainty and margin pressure.

Jeffrey Schulze, CFA, is Director, Head of Economic and Market Strategy at ClearBridge Investments, a subsidiary of Franklin Templeton. His predictions are not intended to be relied upon as a forecast of actual future events or performance or investment advice. Past performance is no guarantee of future returns. Neither ClearBridge Investments nor its information providers are responsible for any damages or losses arising from any use of this information.