MW Recession indicators are out of control. When will this madness end?

By Quentin Fottrell

Everything except jobless claims, which have held steady, and GDP appears to be a recession indicator

They're everywhere. There's no escape.

Americans are on the lookout for signs of a recession. The signs have been with us, depending on whom you ask, pretty much since the last recession in early 2020. First-quarter GDP showed the economy shrinking by 0.3% instead of the forecast 0.4% growth. Two straight negative quarters of GDP growth is viewed as a slam-dunk indication that an official recession call is imminent, but is a drop of 0.3% really that bad?

Clearly, a trade war is not a welcome prospect and, understandably, millions of Americans are on edge after years of recession predictions, geopolitical unrest in the Middle East, a war in Europe, President Donald Trump's tariffs, a Federal Reserve seemingly stymied by the conflicting signs of economic growth and the next potential political twist. If a recession is inevitable, they want it over already.

You'd better watch out. Recession indicators are coming for your peace of mind and your summer vacation, mainly because there are so many of them. When a $70 million Alberto Giacometti bronze bust failed to sell at a Sotheby's auction last week, could that have been the thousandth harbinger of recession or merely indicative of the fact that similar sculptures by the same artist sold for $50 million in recent years?

These days, everything except jobless claims and GDP appears to be a recession indicator.

These days, everything except jobless claims, which have held steady, and GDP appears to be a recession indicator. Last month, Beyonce tickets were selling for less than $60. "The timing is tough with a potential recession in the cards," Samyr Laine, co-founder of Freedom Trail Capital, a venture-capital firm, told MarketWatch. Or maybe Taylor Swift's Eras tour stole Beyonce's thunder?

The list of "soft data" recession indicators has almost no end. They include Chipotle's $(CMG)$ "burrito index," appointments at hairdressers and a drop in sales at coffee shops. (If you are unwilling to stand in line at Starbucks $(SBUX)$ and pay $5.75 for a latte - or $4.75 if you don't live in New York - maybe that means you're using your money wisely, and it bodes well for the U.S. economy?)

Even fashion trends like skinny jeans that existed during the Great Recession are farcical fodder for the recession-indicator grinder. The "lipstick effect," another quirky sign of a potential downturn, posits that people want to make themselves feel good when they are feeling financially insecure and, rather than splashing out on luxury goods, buy a $20 lipstick instead.

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Economist predictions gone awry

When will this madness end? Such internet memes are part clickbait and part genuine curiosity about human beings and a desire to understand our behavior. These memes are curious predictors, if there are genuine reasons to suspect a recession is afoot - or they're merely a form of reverse engineering to spur more lipstick purchases and retroactively act as an I-told-you-so.

You can look at consumer trends highlighted by social-media influencers or you could look at the stock market, official measurements of consumer confidence and hard data like jobs figures. Anecdotal evidence is colorful, but data are more reliable: The University of Michigan's gauge of U.S. consumer sentiment, for what it's worth, has now fallen for five consecutive months and April retail sales were virtually flat.

Economists have also lowered their recession probability scores, although that has done little to dull many recession indicators. Goldman Sachs $(GS)$ economists cut their probability of a recession over the next 12 months to 35% from 45% after Trump lowered his China tariffs to 30% from 145% earlier this month. Similarly, JPMorgan Chase $(JPM)$ said the chances of recession, while elevated, are now below 50%.

Recession predictions have been advanced since at least the end of the last recession.

The most bearish economists will be right eventually. These predictions have been advanced since at least the end of the last recession, with a flurry of economists predicting a whopper of a recession as far back as 2022, citing runaway inflation and the ability (or lack thereof) of the Federal Reserve to lower interest rates without sparking a downturn.

If nothing else, recession predictions have staying power. Citing M2 money supply, Steve H. Hanke, a Johns Hopkins University economics professor, told CNBC in 2022: "We're going to have one whopper of a recession in 2023." Zanny Minton Beddoes, editor-in-chief of the Economist, made a similar prediction in 2022 in an article, "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 wrote. "Soaring food and energy costs have fueled the highest rates of inflation since the 1980s ... " And the expected recession? It still didn't happen.

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Limitations of an inverted yield curve

Other, arguably more reliable indicators, have yet to bear fruit. There is something endlessly fascinating and, perhaps, even sinister about the dreaded inverted yield curve. There's a "dark arts" aspect to the science behind it that makes it compelling to observers. Even the name suggests an economy that's been distorted and mangled in an economist's hall of mirrors.

An inverted yield curve, as its name suggests, occurs when shorter-term yields are higher than those of longer-term Treasurys, flipping the usual or "healthy" spread between short- and long-term borrowing costs. An inverted curve suggests that investors are more pessimistic about the long-term prospects of the economy. At least, this one has some form.

The San Francisco Fed has long pointed out that every U.S. recession over the past 60 years has been preceded by an inverted yield curve. What's more, it said an inverted yield curve has consistently been followed by an economic slowdown. It is a reliable indicator, it's true, but it can take many, many, many months for the spread to presage a recession.

There's a 'dark arts' aspect to the science behind the inverted yield curve that makes it sinister and compelling.

The 10-year yield recently was lower than the 2-year yield for the longest span of time in history, more than two years or 783 days, surpassing a record 624-day inversion recorded in 1978. It finally became uninverted in August 2024. That was eight months ago, and we are still waiting for the promised recession. That length of time stretches even the inverted-yield-curve signal's credibility.

What's lost amid this drumbeat is that recessions are a regular occurrence, they occur for varied reasons, last different lengths of time, and are not consistent in their severity. The 2020 recession lasted 2 months. The 2008 recession lasted 18. It's like we're waiting for the kind of rainstorm that will spoil our retirement when, in fact, it may only cast a cloud for a while.

The "Sahm rule" supposedly signals the beginning of a recession when the three-month moving average of the national unemployment rate rises by 0.5% or more from its low point over the previous 12 months. Assuming this is regarded as a more reliable indicator than, say, the ludicrous "hemline index," we can breathe easily. What's more, unemployment has remained between 4% and 4.2% for the last 12 months.

Jobs market shows modest health

All things considered, Jeff Schulze, head of economic and market strategy at ClearBridge Investments. says the U.S. jobs market remains healthy, although he says monthly job creation averaging 144,000 so far in 2025 "pales in comparison to the red-hot labor market of 2022 when monthly job creation averaged 380,000 and 603,000 in 2021."

So we continue looking for signs. Credit spreads, the gap between corporate bonds' yields and U.S. Treasury yields, give more information on liquidity and whether defaults are on the rise. The wider the spread, some say, the greater the chance of recession, as it reflects investors' reduced appetite for taking risks due to an increasingly uncertain economic outlook.

Overall, they are relatively stable and not indicating an impending recession, despite the contraction of GDP in the first quarter of the year, according to YCharts. U.S. Corporate AAA Option-Adjusted Spread is currently hovering at 0.37%, U.S. Corporate BBB Option-Adjusted Spread is at 1.19%, while U.S. High Yield CCC or Below Option-Adjusted Spread is at 8.79%.

The litany of 'soft data,' without hard data to back it up, has been called a 'vibesession.'

"Nominal GDP is key to understanding credit spreads because it represents the amount of cash available in the economy to service debts, both public and private," says Erik Norland, chief economist and executive director of the CME Group. In the years immediately after the pandemic, GDP expanded rapidly, even as the inflation rate was nearing double digits.

Looking at nominal GDP is more revealing, he says, because for debtors inflation is a form of default. "All borrowers, be they public or private, can reimburse their debts with money that is worth less than when they took those loans. And when the nominal GDP is growing quickly, that money is abundant." And now? GDP growth is in negative territory as of the first quarter, but only just.

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May 19, 2025 07:00 ET (11:00 GMT)

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