Economic performance indicators can sometimes feel a bit outdated. You see, “soft data,” which reflects emotions and expectations, often has a forward-looking perspective. However, there’s noticeable tension between what market players anticipate and what Federal Reserve officials observe.
Currently, homes and businesses are shifting toward a more pessimistic outlook. They worry about an economic slowdown that hasn’t fully materialized in tangible data yet. It’s interesting, though, that just because the mood is gloomy doesn’t mean that spending and investment will necessarily drop.
The first quarter of this year saw a contraction in actual GDP growth, though early estimates suggested significant growth. This could be somewhat misleading, as the data was distorted by an influx of imported goods prior to the full effect of tariffs implemented by the previous administration. As inventories balance out in the next quarter, some of these distortions should start to fade away.
Despite this, there are still concerns about consumer purchasing behavior, particularly regarding automobiles and other goods. If consumers and businesses struggle in the second quarter, we might be looking at a potential recession.
Interestingly, the rollout of the previous administration’s tariff policy has created a level of anxiety in financial markets, along with measures of economic policy uncertainty rising. Many households are now starting to express worries about slowing economic growth and inflation rearing its head again. Rapidly deteriorating soft data has many wondering if a recession is indeed on the horizon.
The National Bureau of Economic Research has a committee responsible for officially marking the beginnings and ends of recessions and expansions. Contrary to the typical media definitions that rely on GDP contractions over two quarters, this committee defines a recession as a significant downturn in economic activity that persists over several months.
In determining when a recession starts, the committee evaluates a range of data, including quarterly GDP and monthly indicators like personal income and employment figures. This approach is beneficial because it’s less influenced by the variability of early GDP estimates, which can often be revised later.
However, the announcement of a recession’s start date can sometimes lag behind the actual economic downturn. For instance, in December of 2008, a recession declaration was made long after it had begun.
Market participants and policymakers, on the other hand, are eager to detect early signs of shifts in the business cycle. The quest for reliable recession indicators that can reliably predict downturns is quite compelling. Unfortunately, many traditional indicators haven’t provided the insight they once did, especially during the current unpredictable climate.
The inverted yield curve is one such historical favorite for predicting recessions. Typically, investors expect higher returns for taking on longer-term risks. However, if they believe monetary policy is overly tight, the yield curve can invert, signaling an impending recession.
Yet, in the post-pandemic landscape, the yield curve hasn’t effectively indicated a recession so far. From October 2022 to December 2024, there was an inversion between the 10-year T-note and three-month Treasury yields, although in the past, such patterns often preceded a recession. So, there’s still a chance this indicator may bear fruit later.
There’s also a metric known as the SAHM Rule, suggesting that a recession is occurring when the three-month moving average of unemployment rises more than 0.5% in the past year. This rule hasn’t signaled a recession lately, with the economy showing resilience and an unemployment rate at 4.2% as of April 2025.
Despite solid headline figures, some revisions to non-farm payroll data suggest wage pressures and potential employment slowdowns might be surfacing. Traditional recession indicators have missed their mark lately, and alternate forecasting methods may provide better insights. Furthermore, ongoing trade issues could create supply chain challenges, signaling future economic vulnerabilities.
There are evident risks of stagnation, and with the prevailing data confusion, the Fed is adopting a cautious stance. There’s a fear that indecision could lead to significant repercussions as the economy navigates this complex landscape.
