A Key Economic Measure Is Signaling a Recession Risk for 2025: Here’s What Americans Need To Know
Written by
Heather Altamirano
Edited by
Amen Oyiboke
Commitment to Our Readers
GOBankingRates' editorial team is committed to bringing you unbiased reviews and information. We use data-driven methodologies to evaluate financial products and services - our reviews and ratings are not influenced by advertisers. You can read more about our editorial guidelines and our products and services review methodology.
20 Years
Helping You Live Richer
Reviewed
by Experts
Trusted by
Millions of Readers
For months there have been loud whispers of a recession and with tariff policies impacting the stock market, inflation-battered Americans are signaling they’re more pessimistic about the economy. The Conference Board’s consumer confidence index recently fell by seven points to 98.3, which is important to take note of because it can often indicate a recession is coming.
“U.S. consumers are already beleaguered after years of high inflation and rising interest rates, which is likely to translate into declining spending,” said Peter C. Earle, senior economist, at the American Institute for Economic Research. “Since consumption accounts for roughly two-thirds of the U.S. GDP calculation, weaker consumer sentiment is one of the major indicators that portends slower economic growth.”
With widespread fears of a recession looming, Earle pointed out that the consumer viewpoint isn’t enough to reliably predict if an economic slowdown will take place, but noted there are other indicators to look out for.
“The key question now is whether this decline reflects fundamental economic weaknesses or concerns of a more temporary nature,” he stated.
With the threat of a recession worrying Americans, here’s what to know according to economists.
A Recession Is Not Imminent
While there is a lot of talk about a recession, it’s not imminent.
“The economy right now is still resilient, with ongoing momentum,” said Ryan Severino, chief economist and head of research at BGO. “We have a tight labor market, supported by a structural, demographics-based labor shortage.”
He added, “Productivity growth remains above pre-pandemic trends. Net worth is still elevated, and balance sheets remain in very good shape, including reasonable use of debt for many households. And public and private investment remains relatively robust.”
A Lot Is Riding on the Federal Reserve
Earle also agreed that a recession isn’t guaranteed, but explained why the Federal Reserve is vital to watch.
“Much will depend upon whether the Federal Reserve’s monetary policy remains restrictive (which would potentially constrain credit and limit business expansion) or loosens too quickly (reigniting inflation),” he said.
“Global economic conditions and geopolitical risk will also influence domestic economic growth. If the job market weakens, corporate earnings fall, consumption wilts away, and prices remain high or continue rising, the probability of a downturn in 2025 will increase.”
The Economy Is at a Crossroads
The economy is facing an ongoing battle with inflation. “The balance between continuing the fight against inflation without dampening economic growth is a delicate one, to say the least,” said Earle.
While the supply and demand for labor is still holding up, Earle noted there “are signs of strain, and rising interest rates are slowing key sectors like housing and business investment,” and although government spending did offer temporary relief it was “at the cost of fiscal constraints and an artificial crutch for economic output.”
Right now there are two big risk factors Americans should be mindful of President Trump’s aggressive tariff policies and “the perils arising of policy maker overcorrections.”
Earle explained, “In the latter case, should Fed policies tighten financial conditions too much, they pose the risk of starting a downturn. Americans are best reminded that downturns are cyclical – and not necessarily severe.”
How To Prepare for a Recession
Nobody knows if a recession is coming, but with many signs pointing to one possibly happening it’s imperative to prepare financially and safeguard your money.
“Reducing discretionary spending, paying down high-interest debt, and bolster emergency savings to weather economic uncertainty are key,” Earle advised.
“For investors, maintaining a diversified portfolio can help mitigate risk. Businesses may want to streamline operations and manage cash flow as conservatively as possible. Firms in vulnerable industries should consider upskilling or expanding their job prospects in case of layoffs,” he added.
A Recession Will Be the Result of Poor Policy Decisions
With the country performing well since the pandemic it’s important to note that a recession is not inevitable, Severino emphasized.
“The U.S. economy has further distanced itself from most other major economies since the pandemic,” he said. “But if we end up in a recession, it will be our own fault because of poor policy decisions.”
Whether or not the economy is moving toward a recession, having a plan of action should be a priority. Build up three to six months of living expenses to tide you over in the event of a layoff, expand your skills, and be prepared to take on temporary freelance work if need be.
“It’s important to remember that recessions create challenges and may be painful, but for the prepared they present opportunities; in particular in the form of lower asset prices and shifting labor market dynamics,” Earle said.
More From GOBankingRates
