Must read: What the recession indicators are telling us

Must read: What the recession indicators are telling us — and what they aren’t

Financial markets and policymakers are trading in questions this week: is the U.S. economy heading for a slowdown that becomes a full-blown recession — or simply sliding back toward more moderate growth after a stretch of outsized resilience? The data give a mixed answer. Some classic recession “red flags” are flashing faintly; others are not. Here’s a fact-based read of the most important indicators as of Aug. 25, 2025, and what they imply for investors, business leaders and policymakers. 

1) Leading indicators: gently down, but not collapsing

The Conference Board’s Leading Economic Index (LEI) edged down by 0.1% in July 2025 to 98.7 and has fallen 2.7% over the last six months — a faster deterioration than in the prior six-month period. That pattern is consistent with weakening momentum and raises the odds of slower growth ahead, but the LEI’s decline has been gradual, not precipitous. The Conference Board itself does not currently forecast an outright recession, though it expects growth to slow in the second half of the year. 

2) Activity and sentiment: PMIs point to expansion, consumers wobble

August flash PMIs for the U.S. and euro-zone surprised to the upside: S&P Global’s U.S. composite PMI climbed and business surveys show the private-sector economy still expanding, while euro-zone composite readings moved above the 50 'expansion' threshold. Those readings argue that firms are still experiencing demand in both services and—more tentatively—manufacturing. By contrast, household surveys show strain: U.S. consumer sentiment has weakened and inflation expectations ticked up in sentiment polls, signalling that consumers are more cautious even as business activity remains positive. The divergence between firm-level activity and household mood complicates the near-term outlook. 

3) Growth and jobs: resilience so far

Official GDP data show the U.S. economy rebounded in Q2 2025, with real GDP growth of 3.0% annualised in the advance estimate — a strong print that conflicts with simple recession narratives. On the jobs front, payroll gains have slowed and the unemployment rate ticked modestly higher to 4.2% in July, which signals some easing in labour tightness but not a labour-market collapse. In short: growth and employment are weaker than their 2024 highs but have not yet rolled over into contraction.

4) Market signals and the yield curve: caution, not clairvoyance

Bond markets remain a key barometer. The U.S. Treasury yield curve has been volatile all year, and investors have lately pushed long-term yields lower while short rates reflect Fed policy uncertainty. Yield-curve inversions historically have preceded recessions, but the timing is imprecise — and recent moves have been driven by a mix of technical flows, lower inflation breakevens and repositioning after central-bank commentary. Jerome Powell’s Jackson Hole remarks — interpreted by many market participants as opening the door to eventual rate cuts — sent yields and risk assets moving, but they did not erase the signal that tightened financial conditions earlier in the cycle. Treat curve signals as an important warning light, not a short-term calendar. 

5) Inflation and monetary policy: the pivot question

Inflation measures have cooled from their post-pandemic peaks, giving central banks room to consider easing. At Jackson Hole (Aug. 22), Fed Chair Jerome Powell framed the Fed’s outlook in a way markets read as dovish — prompting bets on cuts later in the year — but Powell and his colleagues emphasised data dependence. That leaves a narrow path: if inflation re-accelerates (for example because of tariffs or energy shocks) or the labour market weakens sharply, the Fed’s sequencing and timing will matter enormously for whether a slowdown becomes a recession. 

So which scenario is most likely? Two plausible paths

• Soft landing / slowdown (higher probability today): The data mix — solid PMI, a resilient Q2 GDP, only modestly softer jobs — best fits a slowdown rather than an abrupt contraction. Leading indicators and sentiment signal a cooling that could leave growth low but positive if policy eases gently and households keep spending.

• Recession (non-negligible risk): The cumulative decline in the LEI, elevated market valuations, a still-fragile consumer mood and the latent risk from yield-curve dynamics mean the risk of recession in the next 12 months is meaningfully above long-run averages. Historical episodes show that gradual deteriorations can become self-reinforcing — especially if an external shock (sharp energy price rise, geopolitical shock, or policy mistake) hits. 

What investors and companies should watch now

High-frequency labor and wages data (weekly unemployment claims, the August payrolls report): a sudden jump in layoffs would materially raise recession odds. 

Inflation prints (PCE and CPI) and Fed communications: disappointment on inflation could delay rate cuts and sap confidence; dovish surprises could stabilise markets. 

The LEI and PMI trends: a sustained fall in the LEI or a reversal in PMIs toward contraction would be a clear warning.

Credit conditions and corporate guidance: tightening lending standards or a surge in corporate downgrades would suggest stress is building beneath headline GDP. (Credit data are often a late but decisive sign.)

A practical reading for decision-makers

Policymakers: continue to watch the labour market and core inflation carefully; erring on the side of patience in policy adjustments — while preserving central-bank independence — will help avoid knee-jerk moves that could either overheat or choke off recovery. 

Companies: plan for a softer demand environment — tighten discretionary spending, test liquidity plans, and stress-test revenue scenarios — while remaining ready to deploy capital if valuations reset. Businesses that rely heavily on consumer discretionary spending are most exposed. 

Investors: diversify and be selective. Cash is a tool, not a destination. Consider trimming highly leveraged holdings, favouring cash-flow resilient equities (quality franchises, predictable cash flows, low leverage) and maintaining some dry powder to buy if volatility creates opportunities. Short-term trading around macro headlines is risky; a measured, long-horizon approach aligned to one’s risk tolerance will be prudent. 

Bottom line

As of Aug. 25, 2025 the picture is ambiguous: leading indicators and sentiment have softened, signalling higher odds of a slowing economy, yet activity surveys and Q2 GDP show resilience that argues against an immediate recession. The balance of probabilities favours a moderate slowdown rather than a near-term collapse — but the downside risk is material and policy and geopolitical shocks could flip outcomes quickly. In this environment, watch the incoming labour, inflation and credit data closely: they will determine whether the soft-landing scenario holds or whether markets and policymakers must brace for something tougher. 

This article is not financial advice.