2025 Recession Risk Is Increasing According To Multiple Indicators

Increasing Recession Risks: A Closer Look at the US Economy

The US economy is currently navigating uncertain waters, with several key indicators suggesting that the risk of a recession in 2025 may be higher than previously anticipated. While these signals do not definitively predict a downturn, they do highlight a growing list of concerns that warrant close attention. One of the most notable signs comes from the Atlanta Federal Reserve’s GDP Nowcast model, which recently projected that economic growth in the first quarter of 2025 could turn negative. This would mark a significant shift from the modest growth seen in recent quarters. Additionally, parts of the Treasury yield curve have re-inverted, and consumer confidence took a notable dip in February. Prediction markets, such as Kalshi, now estimate a 40% chance of a recession occurring in 2025, up sharply from previous forecasts. While a 40% probability still suggests that a recession is not the most likely outcome, it does indicate that the risks are rising.

A Nowcast for Declining GDP Growth

The Atlanta Federal Reserve’s GDP Nowcast, a tool that uses incoming economic data to forecast growth, has made headlines recently by dipping into negative territory for the first time in 2025. This projection, as of late February, suggests that the economy may be heading toward a contraction in the first quarter. It’s important to note, however, that the Nowcast is a volatile model and can change rapidly as new data becomes available. For instance, the model’s recent shift into negative territory may have been influenced by a surge in imports of industrial supplies reported by the US Census Bureau in January. This influx could be attributed to businesses stockpiling inventory in anticipation of rising import costs due to tariffs. If this proves to be a one-off event, its impact on the broader economy may be limited. Trade data can often be noisy and less indicative of overall economic health, as seen with the contrasting outlook from the New York Federal Reserve’s alternate model, which continues to point to robust growth in the first quarter.

Inverting Yield Curve: A Historical Recession Indicator

One of the most watched—and often ominous—signs in the financial world is the inversion of the Treasury yield curve. Recently, the yield on 10-year government bonds dipped below that of 3-month Treasury bills, according to data from FRED. Historically, this inversion has been a reliable indicator of an impending recession, although its reliability has waned in recent years. It’s worth noting that a yield curve inversion does not guarantee a recession, but it does reflect growing concerns among investors about the economy’s short-term prospects. This shift in the yield curve is particularly significant when viewed alongside other economic signals, as it underscores a growing sense of unease in financial markets.

Other Soft Indicators: Consumer Confidence and the Job Market

In addition to the GDP Nowcast and yield curve inversion, other economic indicators have also begun to show signs of softening. The stock market, for instance, has experienced a slight downturn in recent weeks, and consumer confidence took a sharp hit in February, as reported by the Conference Board. These declines, while not catastrophic, do suggest that households and investors are becoming more cautious about the economic outlook. On a more positive note, the job market has remained relatively resilient, with unemployment rates holding steady at low levels. However, hiring trends have shown a gradual decline, according to data from the US Bureau of Labor Statistics (BLS). This underlying slowdown in hiring could be an early warning sign of broader economic weakness.

What to Expect: Key Tests for the Economy

While the current economic data is undeniably mixed, it’s important to remember that monthly figures can be noisy and prone to revision. Recession signals often appear more frequently than actual recessions themselves, and many of these indicators could prove to be false alarms. That said, the sheer number of cautionary signs is growing, and it’s crucial to monitor several key areas in the coming months. One of the most important tests will be the state of the job market. Historically, a sharp rise in unemployment has been one of the clearest signs of an impending recession. If the unemployment rate remains stable around 4% in upcoming reports, it could suggest that some of these warning signs are overblown, and any slowdown in growth may be driven by technical factors rather than a genuine economic downturn. The BLS will release its Employment Situation reports on March 7, April 4, and May 2, and these will be closely watched for any signs of deterioration.

Conclusion: Navigating Economic Uncertainty

In conclusion, while the US economy is not yet in recession, the rising number of cautionary signals suggests that the risks are increasing. The Atlanta Fed’s negative GDP growth projection, the yield curve inversion, declining consumer confidence, and softening job market all point to potential challenges ahead. However, it’s equally important to remember that many of these indicators have provided false alarms in the past, and the economy has shown remarkable resilience in recent years. The next few months will be critical in determining whether these warning signs coalesce into a full-blown recession or prove to be temporary blips on the radar. For now, the focus remains on the job market, which has long been a bulwark against economic downturns. If unemployment begins to rise, recession risks will likely increase, but if it remains stable, many of the current concerns may fade away. As always, staying informed and maintaining a balanced perspective will be key to navigating this period of economic uncertainty.