How Likely Is A Recession? Here’s What The Data Implies

Economic Fears and Reality: Parsing the Signals

Economic Growth vs. Market Volatility

Recent Data: A Mixed Bag

Economic Uncertainty at a High

Divergent Forecasts: Experts Debate Growth

Consumer and Business Sentiment: A Cause for Concern

The Stock Market: A Leading or Misleading Indicator?

Looking Ahead: Recession Risks and Economic Outlook

In recent weeks, concerns about a potential economic slowdown have intensified, fueled by a decline in the stock market. However, the latest economic indicators tell a different story, with data pointing to continued growth and a robust labor market. The Q4 GDP growth estimate stands at 2.3%, and the unemployment rate, while slightly increasing to 4.1% in February, remains relatively low. The addition of 151,000 jobs during the same period aligns with the trend over the past year. These figures suggest that, at least for now, the economy is not in a recession. However, it’s important to remember that economic data can often lag behind real-time changes, and recessions are sometimes only confirmed after they have begun. The current economic landscape, therefore, presents a mixed picture—one where growth is still evident, but uncertainty looms large.

Economic Uncertainty at a High

The level of economic uncertainty is currently at heights not seen since the pandemic, as indicated by the Economic Policy Uncertainty Index. This index, which tracks factors such as government policy changes, expiring tax provisions, and divergent economic forecasts, reflects the current murkiness of the economic path ahead. This heightened uncertainty is understandable, given the rapidly changing tariff policies and other external factors that could impact economic activity. While this does not necessarily mean a recession is imminent, it does signal that the road ahead for the U.S. economy is fraught with challenges and unpredictability. The situation is further complicated by the divergence in growth forecasts, with different models and experts offering varying predictions about the economic trajectory.

Divergent Forecasts: Experts Debate Growth

There is a noticeable divergence in forecasts about the U.S. economy’s growth prospects. The Atlanta Federal Reserve’s GDP Now model predicts negative growth for Q1 2023, albeit with the caveat that this outlook is heavily influenced by a spike in non-monetary gold imports. Adjusting for this anomaly could bring the growth estimate closer to zero, though still indicative of a slowdown. On the other hand, the New York Fed’s Nowcast model offers a more optimistic view, projecting Q1 growth of around 2%, consistent with the previous quarter’s performance. These contrasting forecasts highlight the complexity of predicting economic trends and the influence of specific factors on growth projections. As more data emerges, these models will likely be refined, offering clearer insights into the economy’s direction.

Consumer and Business Sentiment: A Cause for Concern

One of the primary concerns in the current economic environment is the decline in consumer and business confidence. Federal Reserve Chair Jerome Powell has noted that recent surveys indicate heightened uncertainty among households and businesses regarding the economic outlook. This sentiment could potentially impact future spending and investment decisions, which are crucial drivers of economic growth. However, it is worth noting that historically, consumer and business sentiment has not always been a reliable predictor of consumption growth. Despite this, the current vibe of uncertainty is a significant factor to monitor, as it can have tangible effects on economic activity.

The Stock Market: A Leading or Misleading Indicator?

The stock market has experienced a nearly 10% decline since mid-February, a drop that, while not extreme, is notable. This has brought the S&P 500 back to levels last seen in September 2022. It’s important to keep this decline in perspective; such drops are relatively common, occurring roughly every two years, and are more frequent than recessions. For instance, the market experienced a more significant drop of over 20% between January and October 2022, yet no recession materialized. While the stock market can sometimes serve as an early warning system for economic downturns—such as the sharp decline in early 2020 that preceded the pandemic-induced recession—it is not always a reliable indicator of future economic performance.

Looking Ahead: Recession Risks and Economic Outlook

The risk of a recession has increased, but it is by no means a certainty. Prediction markets, such as Kalshi, estimate a 40% chance of a recession occurring in 2025, a higher-than-average probability. However, this still falls short of signaling a recession as a foregone conclusion. The data from Q4 2022 and early 2023 has been largely positive, though it remains subject to revision. Moving forward, the economic path ahead is marked by high uncertainty, with potential risks including the impact of tariffs on economic activity. Much will depend on the upcoming economic reports for March and April, which will provide crucial insights into whether the current fears of consumers and businesses are justified or exaggerated. As these reports are released, they will help clarify whether the economy is heading towards a recession or if the current concerns are overstated. For now, the U.S. economy finds itself at a crossroads, with growth still apparent but faced with significant challenges that could shape its future trajectory.