Prediction markets imply a 40% chance of recession in 2025. Reported economic data has been generally positive, so far. However, forward-looking indicators, including the stock market suggests risks may be on the horizon. Here’s what the data is telling us, so far.
Economic Data Has Been Good, So Far
Despite recession predictions, recent key economic data has been generally good. Q4 annualized Gross Domestic Product growth rose at a healthy 2.3% rate on the most recent estimate. That’s sufficiently strong that there’s room for growth to decline yet remain above recessionary levels. Unemployment, too, has been relatively stable at 4.1% for February. Of course, these data are subject to revision, but appear encouraging.
Economic Clouds On The Horizon
However, it’s also clear that consumers are worried. In February, consumer confidence fell to levels that can signal a recession ahead, according to Conference Board reports. Retail sales data has been mixed, with a soft January although February was a little more encouraging. Both Delta and American Airlines have cut their growth expectations recently on early signs of softer travel demand. The Challenger Report suggests a high rate of jobs cuts, particularly in government, not all of which may be in the unemployment data yet.
Perhaps most importantly the stock market, having fallen over 10% is now in correction territory. The stock market is volatile, stock market corrections are more frequent than recessions. Nonetheless, recessions when they do occur are generally accompanied by declines in the stock market.
The Impact of Tariffs
Much of the economic concern centers on the impact of tariffs. We haven’t seen much reported data yet, given reporting lags. However, the drop in consumer confidence appears, in part, a concern that tariffs will slow the economy. That could occur if tariffs result in general price rises that slow economic activity.
However, there are other moving parts to consider. For example, tariffs appear to have caused unusual swings in trade flows. For example, the Atlanta Federal Reserve’s GDPNow model is calling for negative growth in Q1, part of that is due to unusually large gold imports, that will be excluded from actual Q1 GDP growth. Still, but even with that adjustment, the model is implying slowing growth compared to Q4. The New York Fed’s Nowcast is much more optimistic, estimating Q1 growth at over 2%.
What To Look For
Currently, there are more estimates that economic growth will slow, than hard data showing a slowdown has occurred. Of course, the pessimism may be self-fulfilling and past economic data could be subject to negative recession.
Nonetheless, if there is to be a 2025 recession in the traditional pattern, then we expect to see increasing unemployment in upcoming reports. Typically a 0.5% absolute rise in unemployment is associated with a recession, and thus far, unemployment has been broadly flat to February. For now, the assessment appears to be that the chance of a U.S. recession in 2025 is elevated, but there is limited hard data to confirm a recession at this point.
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