Is a Recession Coming and What to Expect

A recession is a period of economic decline, typically defined as a decline in gross domestic product (GDP) for two or more consecutive quarters.

Experts are closely monitoring economic indicators to determine if a recession is on the horizon. According to the article, the yield curve, which is the difference between short-term and long-term interest rates, has been inverted, a sign that a recession may be coming.

The inverted yield curve is not a definitive indicator, but it has preceded every recession since the 1950s. This suggests that a recession could be looming, but it's not a guarantee.

The article also notes that a recession can be triggered by various factors, including a decline in consumer spending, a decrease in business investment, and a global economic slowdown.

The Conference Board's Leading Economic Index (LEI) is a key indicator of the US economy's direction, and it's been sending some mixed signals lately. The LEI fell by 0.1% in July 2025, but that's a slight improvement from the 0.3% decline in June.

The LEI's six-month growth rate is still negative, but it's improved slightly, which is a good sign. However, the index's decline over the past six months has been faster than expected.

The Conference Board's Coincident Economic Index (CEI) provides insight into the current state of the economy. It rose by 0.2% in July 2025, which is a positive sign.

The CEI's four component indicators, including payroll employment, personal income less transfer payments, manufacturing and trade sales, and industrial production, are all important factors to consider. In July, all components except industrial production improved.

The Lagging Economic Index (LAG) remained unchanged in July 2025, but it's grown by 0.9% over the past six months, which is a positive trend.

Here's a brief summary of the current economic indicators:

These indicators are all worth keeping an eye on, as they can provide valuable insights into the US economy's direction.

The job market is sending mixed signals, but it's not necessarily a cause for alarm. July's employment report showed that employers are still adding jobs, but at a slower pace than expected.

The labor market's resilience is being tested, with job gains for May and June revised significantly lower. This could be a sign that the economy is starting to cool off.

Consumer spending and confidence levels are also taking a hit, but it doesn't necessarily mean a recession is on the horizon. As long as layoffs and jobless claims don't spike, we might be okay.

Immigration trends are adding another layer of complexity to the job market. More restrictive immigration policies could squeeze the labor supply, potentially leading to higher wages.

The number of small businesses feeling optimistic about expansion has taken a significant hit, with a drop of eight percentage points in just two months. This is one of the largest declines in the National Federation of Independent Business survey's history.

Economic growth is expected to be sluggish, with the US GDP projected to expand by just a 0.25% annualized rate in the second half of 2025, according to J.P. Morgan Research.

The US economy is facing a period of sub-par growth, with the effective ex-ante tariff rate estimated at 13.4%, equivalent to a $430 billion tax hike on US households and businesses, worth 1.4% of GDP.

The Conference Board Leading Economic Index (LEI) for the US fell slightly in July 2025, inched down by 0.1% to 98.7, after declining by 0.3% in June.

Pessimistic consumer expectations and weak new orders continued to weigh down the index, while stock prices remained a key positive support of the LEI.

The Conference Board Coincident Economic Index (CEI) for the US rose by 0.2% in July 2025, a slight increase after a downward revision from an initially reported increase of 0.3% in June.

The job market is cooling off, with July's employment report showing signs of weakening, and job gains for May and June were revised significantly lower.

The unemployment rate remains low, but the labor market's resilience is cracking, and consumer spending and confidence levels are sliding.

The 10-year Treasury bond yield moved down to a recent low of 4.16% from a mid-January high of 4.8%, reflecting growth concerns rather than inflation risk.

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The Federal Reserve is expected to hold policy rates steady over the medium term, with the next rate cut not likely until December. This is according to J.P. Morgan Research, which has pushed back the timing of the resumption of rate cuts from September.

The Fed's decision to hold rates steady is likely due to the uncertain economic outlook, with purchasing managers of manufactured goods indicating more price pressures in recent months. This has historically been a leading indicator of higher consumer inflation.

Tariff hikes enacted so far in 2025 have resulted in the highest US tariff rate since the 1930s, posing a direct risk of stagflation. This could further pressure the Fed to keep rates steady, as they try to balance the risk of inflation with the need for economic growth.

The Fed's target for a healthy inflation rate is 2%, but inflation remains elevated, with prices rising 2.7% in the past year. This is higher than the Fed's target, and could indicate that the economy is growing too quickly.

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In the short term, the Fed is likely to prioritize keeping inflation under control, rather than cutting rates to stimulate growth. This could have implications for businesses and consumers, who may need to adjust their spending and investment plans accordingly.

Here's a summary of the Fed's expected policy changes:

Some economists are lowering their recession forecasts due to recent economic growth, but Hanke believes dismissing this possibility is a mistake.

The US economy has experienced significant economic upheaval in the past, including a recession in 2020 triggered by the COVID pandemic.

Robust GDP growth in the second quarter has been a recent bright spot, but it's essential to consider the underlying issues that remain unresolved.

The probability of a recession has fallen significantly, and one key reason is the détente between the U.S. and China. This has led to a reduced U.S. tariff tax hike and a smaller slide in global sentiment.

The U.S. economy is expected to skirt a recession, although the drag on second-half growth could still be significant. This is because the recent backtrack on U.S.–China tariffs has altered the thinking of economists like Joseph Lupton from J.P. Morgan.

The size of the tariff tax hike has been scaled down, imparting less of a purchasing power squeeze. This is a crucial factor in reducing the risk of a recession.

President Trump's quick unilateral tariff reversal is signaling less tolerance for "short-term pain, long-term gain." This shift in policy is a significant development that's influencing economists' views on the economy.

However, future developments in U.S. policy could still generate additional surprises. This includes negotiations with trading partners and the U.S. fiscal policy stance for the 2026 financial year.

Despite this, J.P. Morgan still sees a 40% probability of a U.S. and global recession by the end of 2025. This indicates that while the situation is improving, there's still considerable downside risk.

There were four recessions that didn't have an overlapping bear market in the post-WWII era: 1945, 1953-54, 1960-61, and 1980-81. These recessions were followed by a bear market in short order.

Recessions and bear markets don't always overlap, as evidenced by four bear markets that didn't overlap with recessions: 1946-47, late-1961-62, 1966, and 1987. This highlights the complexity of economic cycles.

The NBER's indicators for recessions include a combination of coincident and lagging economic indicators, which they monitor to declare recessions. They typically announce the start and end months of recessions, but there's often a lag.

On average, the NBER announces recessions' starts with a seven-month lag, and their ends with a 15-month lag. This means that by the time they announce the start of a recession, it's often already underway.

The delayed imposition and inflationary impacts of tariffs have led some economists to lower their recession forecasts. However, this might be a premature conclusion.

The easing of trade tensions with countries like China has contributed to the current economic optimism. But economists like Hanke warn that unresolved issues from the COVID pandemic could trigger significant economic upheaval.

Robust GDP growth in the second quarter suggests a strong economy, but it's essential to look beyond surface-level indicators.

Hanke has been warning of an impending recession since 2022 due to the stagnation of money supply in the U.S.

The total U.S. money supply was lower in August 2024 than it was in July 2022, with the economy "running on fumes."

Hanke notes that overall money supply is still in line with 2022 levels, and growth remains below his "Golden" rate of 6 percent.

The Federal Reserve's focus on interest rates as the solution to inflation and economic issues is misplaced, according to Hanke.

Monetary policy is not about interest rates, but rather about changes in the money supply, as Hanke emphasized.

Regime uncertainty and the unclear outlook for U.S. businesses under Trump's administration are depressing economic activity and causing businesses to hold off on hiring and investment plans.

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Trade uncertainty has gone parabolic, making it harder for businesses to make decisions and invest in the economy.

The U.S. Trade Policy Uncertainty Index, a measure of economic policy uncertainty, has been tracking the frequency of articles in American newspapers discussing trade policy uncertainty. This index is up, indicating a significant increase in uncertainty.

Uncertainty has already had a negative impact on the economy, denting "animal spirits" and soft economic data.

Trade uncertainty is at an all-time high, having gone parabolic according to Charles Schwab and Bloomberg as of 2/28/2025.

This uncertainty is reflected in the U.S. Trade Policy Uncertainty Index, which tracks the frequency of articles in American newspapers discussing policy-related economic uncertainty and trade policy.

The index suggests that uncertainty is starting to impact hard data, in addition to soft data like survey results.

Citi's Economic Surprise Index, a widely watched indicator, has moved back down and is now in net-negative territory after improving following the election.

This decline in the index is a worrying sign that uncertainty is starting to take a toll on the economy.

Bear markets are a natural part of the economic cycle, and understanding how they work can help you navigate market trends with more confidence.

The National Bureau of Economic Research (NBER) is the official arbiter of recessions, and it's been doing so since 1978. It provides start and end dates for recessions, always in retrospect.

The NBER's definition of a recession is not just two consecutive quarters of negative GDP readings, but a significant decline in economic activity that lasts more than a few months. This definition is more nuanced than you might think.

The NBER's Business Cycle Dating Committee (BCDC) monitors various economic indicators, including real personal income less transfers, nonfarm payroll employment, and industrial production. These indicators help them determine the months of peaks and troughs in the economy.

The NBER doesn't have a fixed rule for how these indicators are weighted, which means they can consider the overall picture of the economy when making their decisions. This approach acknowledges that different indicators can provide different insights into the economy's health.

Economist Steve Hanke believes a recession is inevitable, predicting it will arrive in the second half of the year. He warns that once monetary contractions occur, their effects will be felt for a long time, ultimately impacting economic activity.

The effects of these contractions will be slow to materialize, but their impact will be significant. Hanke's prediction suggests that economic activity will continue to slow down in the coming months.

Hanke's words of caution serve as a reminder that economic downturns can be unpredictable and far-reaching.

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Economist Steve Hanke believes that the economic slowdown will continue into the second half of the year.

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Markets are notoriously bad at predicting certainty, and it's clear that uncertainty is the name of the game right now.

We've seen confidence metrics take a hit, just like they did a couple of years ago, but that time it was a false alarm. This time, it's different.

The data is showing that growth is slowing down, and the vibes that were present just a few months ago are quickly receding.

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Soft data has been soft for a while now, and if it stays that way, the hard data could catch up and become a problem.

The only thing we can be certain of is that things will remain uncertain for the time being, so it's essential to stay flexible and adapt to changing circumstances.