Despite relatively high interest rates and rising unemployment, the chance of a recession in 2025 is estimated to be low. The Federal Reserve’s projections for 2025 call for median economic growth of 2.1% in 2025, which would likely be sufficient to avoid recession risk.
Forecasting site Kalshi currently gives a 21% chance of a recession before 2026, this is roughly an average probability compared to history. The stock market, which can be a leading indicator of economic activity, has risen over recent months. This suggests a recession is not close and the yield curve is moderately steep, which again, suggests a lower recession probability.
Federal Reserve Governor Lisa Cook summarized this by saying “Overall, the U.S. economy starts the year in good shape. Economic growth was quite strong in 2024.” in a speech on January 6, 2024.
Unemployment Risk
That said, a key risk is that unemployment has been moving up over the past 12 months. For November 2024, unemployment was 4.2%. That’s up from 3.7% the year prior. Even relatively small increases in unemployment, including the 0.5% increase seen over historic unemployment reports, can bring about a recession, given the importance of consumer spending for the U.S. economy.
However, unemployment has moved up only from historically low levels, and as such, recession is viewed as less of a risk. However, there is now perhaps less margin for error. Were unemployment to move up materially from its current level, a recession might become a greater risk.
The Housing Market
As much as rising unemployment can be a near-term recession indicator, so too can the housing market. Housing, and construction activity, is a smaller part of the overall U.S. economy. However, swings in construction activity can be large and sometimes large enough to cause recession. For now, the housing market remains relatively steady. For example, housing permits, which can be a leading indicator of housing activity are currently broadly stable. Home prices too, though perhaps moderating have held up better than many forecasts anticipated.
Rising Interest Rates
Rising interest rates can bring about a recession. We’re unlikely to see that in 2025. The expectation is that the Federal Open Market Committee will cut interest rates in 2025, albeit perhaps at a slow pace. However, there is some minor concern that the lagged impact from elevated interest rates from 2024 could still bring about a recession. For example, the New York Federal Reserve’s predictive model gives a 30% chance of a recession by December 2025. That’s largely due to historically elevated interest rates taking some time for their economic impact to be felt. However, as the FOMC has cut interest rates since last summer, that risk though material today, is diminishing.
Recession Risk For 2025
Economic news can change quickly. For now, the chance of a 2025 U.S. recession appears fairly average compared to history. It appears that the main catalyst for a 2025 recession might be increasing unemployment, something that is happening in recent reports. However, so far unemployment’s rise has been sufficiently moderate and from sufficiently low levels such that the economy has continued to grow. However, the stock market can give clues of a pending recession too, and for now, the rising market is a relatively optimistic sign as well.
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