Market turmoil has impacted stocks, raising concerns about a potential recession. Traders on prediction markets are increasingly betting on an economic downturn, with odds for a recession in 2025 rising sharply. Experts point to trade tensions, policy uncertainty, and weakening consumer confidence as recession risks, but note that various economic indicators must be considered collectively to predict the future. While some signals suggest economic instability, such as declining consumer sentiment, other factors like job openings and household spending remain stable.
A recession is defined as a significant and prolonged decline in economic activity. The National Bureau of Economic Research in the U.S. is responsible for officially declaring recessions, a process that can take months due to lagging indicators. Economists monitor various metrics to assess the economy’s health, including consumer behavior and borrowing costs.
Consumer spending, a key driver of economic growth, serves as an early indicator of downturns. Retail sales data, reflecting consumer sentiment and behavior, has shown stability. Policy uncertainty can impact consumer and business decisions, potentially leading to a recession over time. Consumer and business confidence, as measured by surveys, play crucial roles in shaping economic activity.
Other important factors economists consider include interest rate spreads, which have historically been linked to recessions. By analyzing a variety of economic indicators, experts aim to anticipate potential downturns and guide policy decisions to mitigate their impact.
The reliable indicator known as the “yield curve” — a comparison of long- and short-term borrowing rates — has consistently foreshadowed recessions in the past, with one false alarm occurring in 2022. Following a prolonged period of inversion that concluded in late 2024, the yield curve is now showing positive signs. Another positive signal is the Sahm Rule indicator, which monitors unemployment trends and indicates decreasing recession risk as of March. This suggests a strong labor market. While a recession could be on the horizon, the amount of available data is insufficient for a definitive prediction. According to Chinn, interpreting this data is not an exact science, as economic predictors are continually evolving. He notes that while progress is being made in this area, the rarity of recessions makes it challenging to accurately assess the economic landscape.
