Several indicators are hinting that recession risk for the U.S. economy might be greater than previously feared. The Atlanta Federal Reserve’s model recently suggested that economic growth might be negative in Q1 2025. In addition, parts of the yield curve have re-inverted and consumer confidence declined in February. Prediction market Kalshi is currently estimating a 40% chance of recession in 2025; that’s up sharply in recent weeks. Still, a 40% chance still implies that a recession is most likely avoided. This combination of signals is unlikely to be sufficient to predict that a recession is coming in 2025, but the risks are currently rising.
A Nowcast For Declining GDP Growth
Recent nowcasts for Q1 2025 gross domestic product growth dipped into negative territory in late February. That’s according to the latest estimates of the Atlanta Fed’s model that weights incoming economic data to forecast growth. Of course, the model is volatile and may change again as more data comes in, but it currently suggests declining growth in Q1.
The model examines a host of data, but the shift may, in part, be due to increasing imports of industrial supplies for January as reported by the United States Census Bureau. That could be as firms bring in extra inventories in advance to pre-empt rising import costs from tariffs. Should that proves to be a one-off move in trade patterns, it is perhaps less of a concern. Trade patterns are sometimes noisy and less meaningful for economic analysis. For example, alternate model from the New York Federal Reserve continues to point to healthy growth in Q1.
Inverting Yield Curve
However, the GDP nowcast is not a one-off signal. Other indicators are flashing economic warnings, too. The yield on 10-year government debt recently dipped below the yield on 3-month borrowing, according to FRED data. That inversion of the yield curve has been a historically robust recession indicator, though it has proved less reliable in recent years.
Other Soft Indicators
Then elsewhere the stock market has dipped somewhat recently and the Consumer Confidence Index for February declined relatively sharply, as reported by the Conference Board. The job market has remained reasonably healthy overall, though underlying hiring does continue to trend lower according to U.S. Bureau of Labor Statistics Data.
What To Expect
Economic data is often noisy month-to-month and recession signals typically prove far more frequent than actual recessions. However, the range of indicators implying that the U.S. economy could be softening is growing.
A key test will be jobs market data, since sharply rising unemployment is one of the best near-term recession indicators. If the unemployment rate remains at around 4% in upcoming reports, then its likely that some of these other economic signals prove to be a false alarm and that any dip in growth is perhaps due to more technical factors. The Bureau of Labor Statistics will release Employment Situation reports on March 7, April 4 and May 2. If unemployment does move up, then recession risks could move higher still or if unemployment holds steady then these early recession signals may prove a false alarm.
Read the full article here
