Interpreting Recession Indicators 2025
I don't think we're going into a recession, but here's a somewhat objective analysis of competing economic signals.
The Loudest Cry of Financial Collapse “Wolf”
Large financial institutions, executives, pundits, and the media at large is over-marketing the idea of a recession.
I DO NOT think we’re entering a recession anytime soon. However, we are looking at a weird mix of economic indicators. On top of that, war is breaking out in the Middle East. As we all know, war (sadly) tends to be a positive economic catalyst. More on this, and why I believe we won’t have a recession later.
Anyways, there’s a lot of noise to unpack.
Corporate profits just collapsed by the most since the pandemic.
CEO confidence crashed to 2022 lows.
Investment banks are revising recession forecasts upward.
On the other hand, all the actual indicators are alright.
Unemployment is sitting pretty at 4.2%.
Consumer spending keeps chugging along.
The yield curve — historically the most reliable recession predictor — is positive and steepening.
So what's actually happening? Are we heading into recession, or are the pessimists missing something big? Let me walk you through each major indicator and what it's really telling us.
Employment Data: The Great Recession Indicator Debate
The Optimistic Case: These Numbers Look Great
Unemployment is at 4.2% as of May 2025, according to the Bureau of Labor Statistics [1]. That's historically excellent. During the 2008 recession, unemployment peaked at 10%. During the 1990-91 recession, it hit 7.8%. We're basically at full employment.
Initial jobless claims are at 248,000 for the week ending June 7, 2025 [2], which is elevated from recent lows, but nowhere near recession territory. During 2008, claims peaked at over 650,000 per week.
The Sahm Rule — which triggers when unemployment rises 0.5 percentage points above its 12-month low — is currently at 0.30%, well below the recession threshold [3]. This indicator has correctly identified every recession since 1960 with only one false positive [4].
And the details look solid too:
Labor force participation at 62.4% (close to pre-pandemic levels) [5]
Long-term unemployment at 1.7 million (historically low despite recent uptick) [6]
Job openings likely still in the millions when JOLTS data comes out
If companies were really expecting recession, wouldn't they have started laying people off already?
The Pessimistic Case: Employment Is a Lagging Indicator
Let’s be fair though; employment tells you what already happened, not what's about to happen.
Companies don't fire people until they absolutely have to. They'll cut bonuses first, then freeze hiring, then reduce hours, then finally resort to layoffs. By the time unemployment starts ticking up meaningfully, the recession is already underway. The employment data is telling us what companies did last month, not what they're planning to do next month.
Think about it logically: if you're a CEO and you're not sure about next quarter's revenue, are you going to immediately fire your sales team? Of course not. You're going to hold onto them and hope things turn around. Alas, nobody ever knows this kind of stuff.
The Verdict: Depends on Your Timeline
Employment optimists are probably right about the next 3-6 months. These numbers are genuinely strong, and you don't see mass layoffs starting from this level without warning signs.
Employment pessimists might be right about 6-12 months out. If other leading indicators are correct, employment could deteriorate quickly once businesses exhaust other cost-cutting measures.
At the same time, anyone can be right about the next year… which is what makes all of this forecasting annoying.
Corporate Profits: The Canary in the Coal Mine
Corporate profits have been on a relative decline over the past year. According to the U.S. Bureau of Economic Analysis (released May 29, 2025), corporate profits from current production decreased by $118.1 billion in Q1 2025 [7]. That's the largest quarterly decline since Q4 2020 — you know, when the entire world was shut down due to a pandemic.
This came right after a massive $204.7 billion increase in Q4 2024 [7]. So we're talking about a net swing of $322.8 billion between consecutive quarters. That's one of the most dramatic corporate earnings reversals in modern economic history.
And it's broad-based: "Profits from domestic non-financial firms dropped $96.7 billion," according to the BEA [7]. This isn't just one sector having a bad quarter. This is systemic stress across the American business landscape. Companies are pulling their earnings guidance left and right. I could care less, honestly. That’s just the way large corporations handle that level of sudden uncertainty.
The Optimistic Counter: Profits Are Always Volatile
The Q4 2024 to Q1 2025 swing might look scary, but let's put it in context:
Corporate profits in Q1 2025 were still $3.89 trillion annualized (with adjustments)
That's down from Q4, but it's not like profits went negative
Companies regularly have bad quarters without triggering recessions
This is likely companies adjusting to new cost structures from tariffs and policy changes.
Profits go up, things change, then profits go down, then the businesses adjust and they go back up. Such is (human) life.
The Verdict: Concerning But Not Definitive
The profit decline is definitely unusual in its magnitude and breadth. But corporate America has survived bigger profit shocks before without falling into recession.
The key question: Is this a temporary adjustment to new policies, or the beginning of a more serious deterioration? We'll know more when Q2 earnings start rolling in.
CEO Confidence: When Leadership Panics
The Conference Board's Measure of CEO Confidence fell by 26 points in Q2 2025 to just 34 — the lowest level since Q4 2022 [8]. According to their methodology, anything below 50 reflects more negative than positive responses.
Here's the kicker: 83% of CEOs said they expect a recession in the next 12-18 months [8]. This… I mean… okay, I’ll save my tangent for later. For now, it’s just something worth noting.
The practical impacts are already showing up:
Share of CEOs expecting to revise down investment plans doubled to 26% [8]
Share expecting to upgrade investment plans dropped 14 percentage points to 19% [8]
This was "the largest quarter-over-quarter decline in the history of the survey, which started in 1976" [8]
The Skeptical Take: CEO Surveys Are Notoriously Wrong
Here's an uncomfortable truth: CEO confidence surveys have a terrible track record.
CEOs are pessimistic by nature. They're paid to worry about everything that could go wrong. Of course they're going to say recession is likely — that's their job!
Some inconvenient data about CEO predictions:
CEO confidence has been below 50 for extended periods without triggering recession
Business leader surveys consistently overestimate recession probability
The same CEOs predicting recession are still hiring and investing
Actions speak louder than survey responses. If 83% of CEOs really expected recession in the next 12-18 months, why aren't unemployment claims spiking? Why aren't companies slashing capital expenditures across the board?
Look at what CEOs are doing, not what they're saying.
The Verdict: Sentiment vs. Reality
CEO pessimism is definitely real and historically extreme. But their actual business decisions don't yet match their survey responses.
The question is timing: Will CEO pessimism become a self-fulfilling prophecy as they cut investment and hiring? Or will improving conditions make them look overly cautious in hindsight?
Federal Reserve Assessment: Policy in Limbo
The Concerning Signal: Acknowledged "Difficult Tradeoffs"
The Fed doesn't usually show its cards, but the May 6-7 FOMC minutes are... concerning.
According to the official minutes (released May 28), Fed officials acknowledged that "uncertainty about the economic outlook has increased further" [9]. They admitted they could face "difficult tradeoffs" between rising inflation and rising unemployment [9].
More telling: Fed staff provided explicit warnings about "increasing recession risk" [10]. When the Fed's own economists are warning about recession risk, that's not background noise.
The minutes reveal that participants agreed "it was appropriate to take a cautious approach until the net economic effects of the array of changes to government policies become clearer" [9]. Translation: We have no idea what's about to happen.
The Balanced Take: Caution Isn't Panic
But maybe the Fed's caution is actually smart, not panicked.
Yes, Fed officials are being careful about policy changes until trade uncertainty resolves. But "cautious" doesn't mean "powerless." The Fed still has:
200 basis points of rate-cutting room before hitting zero
Balance sheet tools for additional stimulus if needed
Forward guidance to shape market expectations
Coordination capabilities with other central banks
The Fed's waiting approach might be exactly what a responsible central bank should do during uncertain times. They're not paralyzed — they're being prudent.
And if recession risks really spike, the Fed can respond aggressively. Markets know this, which might be why they're not pricing in extreme recession probability.
The Verdict: Watchful Waiting
The Fed is clearly more concerned than they were six months ago. But they're maintaining optionality rather than panicking.
Their assessment matters because they have the best economic data and forecasting resources in the world. If Fed staff are warning about recession risk, that deserves attention.
Investment Bank Forecasts: Wall Street's Rapid Revision
The Dramatic Shift: Major Upward Revisions
Here's where the rubber meets the road.
J.P. Morgan raised their U.S. recession probability from 40% to 60% in April [11]. Goldman Sachs bumped theirs to 45%, up from 35% within a single week [12]. These aren't small adjustments — these are dramatic upward revisions from institutions that have billions riding on getting these forecasts right.
Barclays, Deutsche Bank, RBC Capital Markets, and UBS have all warned that the U.S. economy faces higher recession risk [11]. Some are forecasting economic growth "broadly between 0.1% and 1%" — basically stagnation territory [11].
According to Reuters reporting, the sudden pessimism is primarily due to "tariff-related economic uncertainty" and "intensifying corporate stress" [11].
The Alternative View: Banks Often Get It Wrong
But investment banks have a mixed track record on recession predictions.
Remember that these are the same institutions that:
Missed the 2008 housing crisis until it was too late
Were overly optimistic about economic recovery in 2001-2002
Have consistently overestimated recession probability during expansion periods
Plus, bank economists have incentives to be dramatic. Calling for recession gets attention and makes them look smart if they're right. Being boringly correct about continued growth doesn't make headlines.
Maybe the 40-60% recession forecasts are just the latest example of Wall Street groupthink — everyone piling into the same trade at the same time.
The Verdict: Informed but Not Infallible
Investment bank economists do have access to excellent data and analysis. Their rapid forecast revisions suggest they're seeing something genuinely concerning in their models.
But they're not oracles. Their track record is good enough to pay attention to, not good enough to bet the house on.
The Yield Curve: The Most Reliable Predictor Says "No Recession"
The Optimistic Signal: Positive and Steepening
The yield curve — specifically the spread between 10-year and 2-year Treasury yields — is currently positive at 46 basis points as of June 2025 [13].
This is the historically reliable recession indicator. It correctly predicted every recession since 1960, with only one false positive (in 1966) [4]. The fact that it's not just positive but steepening is a massive signal against recession.
Here's what's really important: The curve doesn't just reflect Fed policy expectations — it reflects the collective wisdom of millions of investors with trillions of dollars at stake. If those investors really expected recession, they'd be piling into long-term Treasuries, which would invert the curve again.
But they're not doing that. They're actually selling long-term bonds, which suggests they expect:
Economic growth to continue
Inflation to remain manageable
Fed policy to be appropriate for current conditions
The Skeptical Take: This Time Might Be Different
But the yield curve reflects policy expectations, not underlying economic fundamentals.
With Fed officials acknowledging they're basically waiting for policy clarity, traditional monetary policy transmission mechanisms aren't working normally. The curve might be positive simply because nobody knows what Fed policy should be, not because the economy is fundamentally healthy.
Plus, the curve spent most of 2024 inverted — we just recently normalized. The question isn't whether the curve is positive now, it's whether that normalization reflects genuine economic strength or just policy confusion.
And in a period of intense policy uncertainty, maybe historical relationships don't hold.
The Verdict: Still the Best Single Indicator
The yield curve's track record is too good to ignore. When the smartest, most liquid market in the world is betting against recession, that carries enormous weight.
But the policy uncertainty factor is unprecedented. This might be the one time when the yield curve's signal gets muddled by non-economic factors.
Consumer Indicators: Resilient but Volatile
The Strength: Balance Sheets and Spending
American consumers are sitting on a mountain of cash.
According to Bank of America Institute analysis, "most households remained financially sound, thanks to a resilient labor market characterized by low layoffs" [14]. The specifics are encouraging:
Household debt-to-income ratios remain manageable [14]
Mortgage delinquencies are near historic lows [14]
Many households still have pandemic-era savings [14]
Retail sales in April 2025 were up 0.1% monthly and 5.2% annually, according to the Census Bureau [15]. The National Retail Federation forecasts 2.7% to 3.7% retail growth for 2025 [16].
If consumers have money and jobs, why wouldn't they keep spending? And if they keep spending, where's the recession going to come from?
The Concern: Extreme Volatility in Sentiment
But consumer confidence has been on the wildest roller coaster I've ever seen.
The Conference Board Consumer Confidence Index went from 92.9 in March to 86.0 in April (lowest since May 2020) to 98.0 in May [17]. That's a 12-point swing in a single month.
The May rebound was primarily driven by tariff pause announcements [17] — meaning consumer confidence has become completely dependent on policy announcements. When economic sentiment becomes this reactive to political news, it suggests fundamental instability.
Plus, EY economists note that retail sales strength might be artificial: "April figures are overstated given some of the demand front-loading likely bled into April" [18] as people bought stuff before tariffs hit.
The Verdict: Strong Fundamentals, Shaky Sentiment
Consumer financial health remains solid. But the extreme volatility in sentiment suggests this could change quickly if conditions deteriorate.
The key question: Will strong balance sheets sustain spending even if confidence stays volatile? Or will sentiment eventually drive behavior?
Policy Uncertainty: The Wild Card
The Unprecedented Factor: Nobody Knows the Rules
Here's what's making everyone crazy: Nobody knows what the economic rules are going to be.
According to various analyses, current tariff policies represent "an effective ex-ante tariff rate of 13.4%, equivalent to a $430 billion tax hike on U.S. households and businesses, worth 1.4% of GDP" [19].
But the bigger problem isn't even the tariffs themselves — it's the uncertainty around them. Companies don't know which tariffs will stick, which will get paused, which will get escalated.
Ford suspended its annual guidance in May, saying tariffs would cost them about $1.5 billion [20]. General Motors cut their 2025 profit forecast and paused $2 billion in share buybacks [20]. Mercedes pulled their earnings guidance entirely [20].
When major corporations stop planning beyond the next quarter, that's not a good sign for economic stability.
The Optimistic View: Uncertainty Usually Resolves
But policy uncertainty episodes historically resolve themselves:
NAFTA uncertainty in the early 1990s
Brexit negotiations (took forever but didn't cause global recession)
Various U.S. government shutdown crises
Previous trade disputes
Look at what happened with consumer confidence: it crashed to 86.0 in April and rebounded to 98.0 in May when some tariff uncertainty was reduced. That 12-point swing shows how quickly sentiment can recover when policy clarifies.
Markets and businesses adapt faster than pessimists expect. Maybe the uncertainty will resolve quickly once trade policies get sorted out.
The Verdict: Timing Is Everything
Policy uncertainty is definitely creating real economic costs right now. But whether it triggers recession depends on how long it persists.
If uncertainty resolves in the next few months, the economic damage might be minimal. If it drags on for quarters, the cumulative effects could be serious.
What the Data Actually Says
After looking at all the indicators objectively, here's what I see:
The Case for Lower Recession Risk (20-30%)
Employment data is genuinely excellent across multiple metrics
Consumer balance sheets remain strong with manageable debt levels
The yield curve is positive and steepening (historically very reliable)
Financial system is well-capitalized (unlike 2008)
American economy has proven remarkably resilient to recent shocks
The Case for Higher Recession Risk (45-60%)
Corporate profits collapsed by the most since pandemic
CEO confidence at historic lows with 83% expecting recession
Investment banks rapidly revising forecasts upward
Fed acknowledging "difficult tradeoffs" and recession risks
Policy uncertainty creating planning paralysis
My Assessment: 25-35% Probability of a Recession
The number itself isn’t meaningful, but everyone always wants things like this in terms of “chances” or probabilities. You can say, there’s a 1 in 3 chance of a recession.
Why not lower? The forward-looking business indicators are genuinely concerning. When corporate profits are collapsing and business leaders are this pessimistic, it usually precedes employment problems by 6-12 months.
Why not higher? The employment and consumer fundamentals are too strong to ignore. The yield curve's track record is too good. The financial system is too stable.
The key insight: We're in a period where forward-looking and backward-looking indicators are giving completely different signals. In normal times, they move together. When they diverge this dramatically, prediction becomes much harder.
What to Watch Going Forward
The indicators that will resolve this debate:
Short-term (Next 3 months):
Initial jobless claims: Sustained moves above 250,000 would be the first sign of employment deterioration
Corporate earnings guidance: Are more companies pulling forecasts, or are some starting to provide clarity?
Policy developments: How quickly does trade uncertainty resolve?
Medium-term (3-9 months):
Actual employment data: Will layoffs start if corporate pessimism persists?
Consumer spending patterns: Will strong balance sheets sustain spending if sentiment stays volatile?
Federal Reserve actions: How aggressively will they cut rates if conditions deteriorate?
Long-term (9+ months):
Corporate investment decisions: Will CEO pessimism translate into reduced capital spending?
Financial market stability: Can credit markets handle prolonged uncertainty?
The bottom line: We're looking at the most confusing economic picture in years. Traditional indicators are pointing in different directions, making recession prediction unusually difficult.
What's clear: Whether we get recession depends heavily on how quickly policy uncertainty resolves and whether business pessimism becomes self-fulfilling through reduced investment and hiring.
The data doesn't give us certainty — but it gives us a framework for watching how this unfolds.
Sources and References
[1] U.S. Bureau of Labor Statistics, "Employment Situation Summary - May 2025," June 6, 2025
[2] U.S. Department of Labor, "Initial Jobless Claims for week ending June 7, 2025," June 12, 2025
[3] Federal Reserve Economic Data (FRED), "Real-time Sahm Rule Recession Indicator," St. Louis Fed, accessed June 13, 2025
[4] Claudia Sahm, "The Sahm Rule Recession Indicator," Federal Reserve Economic Data documentation
[5] U.S. Bureau of Labor Statistics, "Labor Force Participation Rate," May 2025 Employment Report
[6] AARP Public Policy Institute, "May 2025 Employment Data Digest," June 2025
[7] U.S. Bureau of Economic Analysis, "Gross Domestic Product (Second Estimate), Corporate Profits (Preliminary Estimate), 1st Quarter 2025," May 29, 2025
[8] The Conference Board, "CEO Confidence Declined Significantly in Q2 2025," June 2025
[9] Federal Reserve, "FOMC Minutes, May 6-7, 2025," released May 28, 2025
[10] Reuters, "Fed saw inflation, jobless, stability risks at May meeting, minutes show," May 28, 2025
[11] Reuters, "Global brokerages raise recession odds; J.P.Morgan sees 60% chance," April 5, 2025
[12] Reuters, "Goldman Sachs raises odds of US recession to 45%, second hike in a week," April 7, 2025
[13] Federal Reserve Economic Data (FRED), "10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity," accessed June 13, 2025
[14] U.S. Bank, "Consumer Spending in the U.S.," Economic Analysis, June 2025
[15] U.S. Census Bureau, "Monthly Retail Trade - Sales Report," April 2025
[16] National Retail Federation, "2025 Retail Sales Forecast," cited in original analysis
[17] The Conference Board, "US Consumer Confidence Partially Rebounds in May," May 27, 2025
[18] EY, "Retail Sales April 2025," Economic Analysis, May 2025
[19] J.P. Morgan Research, "What Is the Probability of a Recession?" 2025 analysis
[20] Reuters, "US corporate profits decrease sharply in first quarter," May 29, 2025