Five Red Flags Signal A Coming Recession

Economic Storm Clouds: Understanding the Red Flags Pointing to a Potential Recession

1. Shaky Worker Confidence: The "Take-This-Job-and-Shove-It" Indicator

The latest data from the Labor Department has revealed a concerning trend in the labor market: the quits rate has been steadily declining for three consecutive months, dropping from a peak of 3% in March 2022 to 2.2% in February 2025. This "Take-This-Job-and-Shove-It" Indicator, as it’s been dubbed, measures worker confidence and willingness to leave their jobs for potentially better opportunities. A higher quits rate typically signals a strong labor market, where workers feel secure in their ability to find better employment. However, the current downward trend suggests that workers are becoming more cautious, possibly indicating a weakening economy. Hiring has slowed, and layoffs have increased slightly, further fueling recessionary concerns. When workers lose confidence in their job prospects, it can have a ripple effect on the broader economy.

2. Declining Consumer Confidence: A Reflection of Economic Anxiety

Consumer confidence, a critical driver of economic health, has been on a downward trajectory. The Consumer Confidence Index (CCI), which tracks how optimistic Americans feel about their financial situations and the economy, has been falling recently. Given that consumer spending accounts for about 70% of the U.S. economy, this decline could signal trouble ahead. The current dip in consumer confidence can be attributed to several factors: ongoing inflation concerns, the impact of tariffs raising prices further, attacks on unions reducing workers’ bargaining power, and the massive federal government firings creating a sense of policy chaos. These factors are contributing to a climate of uncertainty, where consumers are becoming more pessimistic about their financial futures. This gloom is not just a matter of sentiment; it has real-world implications for consumption and, by extension, economic growth.

3. Rising Inventories: A Warning Sign for the Economy

Another red flag is the buildup of unintended inventories, which occurs when businesses accumulate more goods than they planned. While an increase in inventories might initially seem positive, it can actually indicate that businesses have overestimated consumer demand. This mismatch can lead to reduced investments, as businesses fear a slowdown in demand, possibly due to retaliatory tariffs. When inventories pile up, businesses often panic, leading to reduced hiring and investment, which can set off a downward economic spiral. This phenomenon aligns with the insights of economists like John Maynard Keynes, who emphasized the role of business expectations in driving the business cycle. If businesses expect a slowdown, they are likely to act in ways that make it a self-fulfilling prophecy.

4. The Conference Board’s Leading Economic Index: A Historic Predictor

The Leading Economic Index (LEI) compiled by The Conference Board has been a reliable indicator of economic health since 1959. The LEI is a composite of 10 key economic indicators, including jobless claims, stock prices, building permits, and manufacturing orders. A recent decline in the LEI, from 101.5 in January 2025 following a modest increase in December 2024, is a cause for concern. While the LEI doesn’t predict the future with certainty, its historical track record suggests it’s a reliable signal of potential economic trouble. The decline in LEI, coupled with other signs of economic weakness, strengthens the case for a potential recession.

5. Gloom and Doom on Wall Street: Market Sentiment Shifts

The financial community is increasingly pessimistic about the economic outlook. The CNN Fear & Greed Index has shifted dramatically from “neutral” in January to “extreme fear” in recent days. Wall Street analysts, such as David Kostin of Goldman Sachs, have revised their earnings growth forecasts downward, reflecting a weaker economic outlook. Economists at JPMorgan have also raised concerns about a potential U.S. recession, citing unpredictable tariff policies and poor economic management. Journalists have even coined the term “Trumpcession” to describe the current economic scenario. This shift in sentiment is not just a matter of market volatility; it reflects a broader loss of confidence in the economy’s direction.

The Unnecessary Recession: A Policy-Induced Economic Storm

The potential recession looming on the horizon is particularly disheartening because it appears to be largely avoidable. The primary culprit, according to many economists, is President Trump’s trade war and the tariffs imposed on major trading partners. These policies have increased costs for both consumers and businesses, stifling economic growth. While some experts, like Jared Bernstein, argue that the labor market remains strong with unemployment at 4%, this may be a lagging indicator. The initial response to economic uncertainty—halting expansion plans and trimming investments—often precedes job losses. This aligns with The Wall Street Journal’s assessment that Trump may disrupt the hoped-for soft landing, leading to a more severe economic downturn. The combination of weak worker confidence, declining consumer sentiment, rising inventories, a failing LEI, and Wall Street’s gloom suggests that the economy is heading into stormy weather, potentially leading to a recession that could have been avoided with more prudent policy decisions.**