They can be found anywhere. No way out.
People are watching for indications of a recession. Depending on who you ask, the warning flags have existed since the early 2020 recession. Instead of the anticipated 0.4% increase, the economy shrank by 0.3% in the first quarter, according to GDP. An official recession announcement is thought to be looming after two consecutive quarters of GDP growth that are negative, but is a 0.3% decline really that bad?
After years of recession forecasts, geopolitical unrest in the Middle East, a war in Europe, President Donald Trump’s tariffs, a Federal Reserve that appears to be stymied by the contradictory signs of economic growth, and the next possible political turn, it is evident that a trade war is not a welcome prospect, and millions of Americans are understandably on edge. They want a recession to end quickly if one is unavoidable.
You should be careful. Because there are so many of them, recession signs are coming for your summer vacation and peace of mind. Could this week’s failure to sell a $70 million bronze bust by Alberto Giacometti at a Sotheby’s auction be the thousandth sign of a recession, or is it just a reflection of the reality that comparable sculptures by the same artist had sold for $50 million in recent years?
You should be careful. There are signs of a recession that will affect your summer vacation and peace of mind.
Everything seems to be a recession indicator these days, with the exception of GDP and unemployment claims, which have remained stable. Tickets for Beyonce were selling for less than $60 last month. “The timing is tough with a potential recession in the cards,” Samyr Laine, a co-founder of the venture capital firm Freedom Trail Capital, told MarketWatch. Or was Beyonce overshadowed by Taylor Swift’s Eras tour?
There is a seemingly endless variety of “soft data” recession signs. These include haircut appointments, Chipotle’s (CMG) “burrito index,” and a decline in coffee shop sales. (Maybe you’re spending your money sensibly and it’s good for the U.S. economy if you don’t want to wait in line at Starbucks (SBUX) and pay $5.75 for a latte, or $4.75 if you don’t live in New York.)
For the recession-indicator grinder, even fashion fads from the Great Recession, such as skinny jeans, are ridiculous material. Another odd indicator of a possible downturn is the “lipstick effect,” which suggests that when individuals are feeling insecure about their finances, they want to feel good about themselves and instead of spending money on upscale items, they purchase a $20 lipstick.
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Forecasts by economists gone wrong
When is this crazy going to stop? These internet memes are a combination of clickbait and sincere interest in people and how we behave. These memes are interesting indicators of whether there are good grounds to believe a recession is coming or whether they are just a way to appear like an I-told-you-so and encourage more lipstick purchases.
Consumer trends that are emphasized by social media influencers can be examined, as can the stock market, official consumer confidence surveys, and quantitative data such as employment statistics. Data are more trustworthy than colorful anecdotal evidence: Retail sales in April were essentially flat, and the University of Michigan’s indicator of U.S. consumer mood has now declined for five months in a row.
Although many recession indications have not been much dulled, economists have also reduced their recession probability scores. Following Trump’s reduction of his tariffs on China to 30% from 145% earlier this month, Goldman Sachs (GS) analysts reduced their forecast of a recession over the next 12 months from 45% to 35%. Similarly, JPMorgan Chase (JPM) stated that although the likelihood of a recession is high, it is now less than 50%.
Eventually, the most pessimistic economists will be correct. They have been making predictions since at least 2022.
Eventually, the most pessimistic economists will be correct. Economists have been making predictions since soon after the last recession ended. As far back as 2022, a number of them predicted a massive recession, citing runaway inflation and the Federal Reserve’s (or lack thereof) ability to cut interest rates without causing a downturn.
If nothing else, forecasts of a recession are reliable. In 2022, Steve H. Hanke, an economics professor at Johns Hopkins University, warned CNBC that “we’re going to have one whopper of a recession in 2023,” citing the M2 money supply. Similar predictions were made in 2022 by Zanny Minton Beddoes, editor-in-chief of the Economist, in an essay titled “Why a global recession is inevitable in 2023.”
“Vladimir Putin’s invasion of Ukraine has led to the biggest land war in Europe since 1945, the most serious risk of nuclear escalation since the Cuban missile crisis and the most far-reaching sanctions regime since the 1930s,” she stated. “Soaring food and energy costs have fueled the highest rates of inflation since the 1980s …” What about the anticipated recession? It hasn’t happened yet.
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An inverted yield curve’s drawbacks
Other, possibly more trustworthy markers have not yet shown results. The infamous inverted yield curve has an enduringly interesting and maybe sinister quality. Observers find the science behind it interesting because of its “dark arts” component. The word itself alludes to an economy that has been warped and warped in the hall of mirrors of an economist.
As the name implies, an inverted yield curve is created when the typical or “healthy” spread between short- and long-term borrowing costs is reversed, with shorter-term yields being greater than those of longer-term Treasurys. Investor pessimism on the economy’s long-term prospects is shown by an inverted curve. This one at least has some shape.
The San Francisco Fed has long noted that an inverted yield curve has preceded every U.S. recession in the last 60 years. Additionally, it stated that an economic slowdown has always preceded an inverted yield curve. It’s true that the spread is a good signal, but it can take months for it to predict a recession.
The science underlying the inverted yield curve has a scary and captivating ‘dark arts’ component.
For the longest period in history—more than two years or 783 days—the 10-year yield fell below the 2-year yield, breaking a record 624-day inversion set in 1978. Finally, in August 2024, it was uninverted. We are still waiting for the projected recession, which was eight months ago. Even the credibility of the inverted-yield-curve signal is stretched by that duration.
The fact that recessions are frequent, stem from a variety of causes, have varying durations, and fluctuate in intensity is obscured by this drumbeat. The recession of 2020 lasted for two months. The recession of 2008 lasted for eighteen years. We seem to be anticipating the kind of downpour that would ruin our retirement, although it might only be a temporary inconvenience.
When the national unemployment rate’s three-month moving average increases by 0.5% or more from its lowest point during the preceding 12 months, the “Sahm rule” is said to have been activated. If this is considered a more accurate measure than, say, the ridiculous “hemline index,” then we may relax. Furthermore, throughout the past 12 months, unemployment has stayed in the range of 4% and 4.2%.
The state of the job market is moderately good.
The U.S. labor market is still doing well overall, according to Jeff Schulze, head of economic and market strategy at ClearBridge Investments. However, he notes that the average monthly job creation in 2025 thus far is 144,000, which “pales in comparison to the red-hot labor market of 2022 when monthly job creation averaged 380,000 and 603,000 in 2021.”
Thus, we keep searching for indications. The difference between the rates on corporate bonds and U.S. Treasury bonds, or credit spreads, provides additional insight about liquidity and the potential for an increase in defaults. Because it represents investors’ diminished willingness to take risks as a result of an increasingly uncertain economic outlook, some argue that the wider the gap, the higher the likelihood of a recession.
According to YCharts, despite the GDP contraction in the first quarter of the year, they are generally stable and do not portend an imminent recession. The current values of the U.S. Corporate AAA Option-Adjusted Spread, U.S. Corporate BBB Option-Adjusted Spread, and U.S. High Yield CCC or Below Option-Adjusted Spread are 0.37%, 1.19%, and 8.79%, respectively.
A “vibesession” is the term used to describe the plethora of “soft data” that lacks actual evidence to support it.
Erik Norland, chief economist and executive director of the CME Group, states that nominal GDP is essential to comprehending credit spreads since it shows how much money is available in the economy to pay off obligations, both public and private. Even though the inflation rate was approaching double digits, GDP grew quickly in the years immediately following the pandemic.
He claims that since inflation is a type of default for debtors, it is more illuminating to look at nominal GDP. “All debtors, whether private or public, can pay back their obligations with funds that are worth less than what they were before taking out the loans. And that money is plenty when the nominal GDP is expanding rapidly. And now? As of the first quarter, GDP growth is barely in negative territory.
