If you have even a light touch on the pulse on the economy you have probably noticed things feel a little weak. And by weak, I mean the kind of slow-motion collapse economists like me get paid to anticipate.
I’ve spent decades teaching economics, and one of the most common questions I get is: “Are we heading into a recession?” I see five waving red flags warning we are headed for an economic slowdown: the quits rate, the index of consumer confidence; unintended inventories; the composite index of leading indicators; and general alarm and gloom on Wall Street.
Red Flag No. 1: Shaky Worker Confidence
Just recently, the Labor Department posted what I call the “Take-This-Job-and-Shove-It” Indicator to measure worker confidence.
Flashing red is the report for February 2025 revealing quits rate is falling for the third consecutive month, reaching 2.2% down from a peak of 3% in March 2022.
The new report also indicated hiring slowed and layoffs increased slightly, further reinforcing recessionary concerns the economy is weakening, and workers are nervous.
When workers quit a job they usually have a bit of swagger and confidence they can get another job just as good or better than the one they just walked away from. Every month the government reports the quits rate—the percentage of workers who voluntarily leave their jobs; higher quits rates suggest that employees feel secure in their ability to find new employment because of robust labor market conditions and a healthy economy.
Red Flag No. 2: Declining Consumer Confidence
Since workers are consumers worker jitters affect consumer confidence. Economists closely monitor consumer confidence—which just isn’t about how people feel about being seen in a bathing suit.
The Consumer Confidence Index has been tracking consumer sentiment since 1967, offering a long-running measure of how optimistic or pessimistic Americans feel about their financial situations and the economy. It is a widely followed indicator because consumer spending drives about 70% of the U.S. economy.
Last month the index flashed red; it has been falling recently. Consumers already worried about inflation understand tariffs will cause even more prices to rise. Attacks on unions reduce workers’ bargaining power; dashing hopes rising incomes will make up for rising prices. And the massive random federal government firings generates a sense of chaos in government policy making.
Approximately 80% of federal workers reside outside of Washington, D.C. So, these abrupt firings are causing job losses nationwide, affecting nearly every community. Firings that have little economic or policy basis has a reverberating effect on households, as reflected in these gloomy consumer confidence surveys.
Red Flag No. 3: Rising Inventories
Unintended inventory buildups—goods that businesses did not plan to keep on hand—are measured as investment. This means reporting an increase in inventories can initially appear positive.
But economists worry an increase in investment spending can just be unintended inventories’ indicating businesses overestimated consumer demand.
In a market economy, when businesses see goods piling up on the shelf, they freak out a bit. And, when the private sector fears a slowdown in demand for their products (perhaps because of retaliatory tariffs), the fear can lead to reduced investments, signaling other firms to slow hiring, thereby initiating a downward economic spiral. Mainstream economists since John Maynard Keynes know that business expectations drive the business cycle, and this time business sentiment could be driving the economy into the ditch.
Red Flag No. 4: The Conference Board’s Index of Leading Economic Indicators
The Conference Board’s Leading Economic Index declined by 0.3% in January 2025 to 101.5, following a 0.1% increase in December 2024. Uh oh. A decline in this index amid other signs of illness is bad news.
The Leading Economic Index has been around since 1959—long enough to outlast countless recessions and stock market crashes and booms turned into busts. This powerhouse of an index is made up of 10 key economic indicators, including jobless claims, stock prices, building permits, and manufacturing orders—it’s like a checkup, MRI and blood test all rolled into one indicating the health of the economy. It can’t actually predict if the economy will fall sick in the future, but it’s had a great track record.
Reg Flag No. 5: Gloom And Doom
Press reports, Wall Street reports, and the stock market falling this week have shifted expectations from optimism to pessimism in just a few days and hours. These red flags collectively suggest that a recession may be on the horizon.
CNN’s Fear & Greed Index of market sentiment tumbled further into “extreme fear” mode on Monday, a big shift from “neutral” from January. David Kostin, the Chief U.S. Equity Strategist of Goldman Sachs, has revised his earnings growth forecast because of a weaker economic outlook.
Economists at JPMorgan have expressed heightened concerns about a potential U.S. recession, attributing the increased risks to unpredictable tariff policies and economic management. Journalists have taken to calling the current economic outlook a Trumpcession.
I feel sorry for the tens of millions of older workers and retirees who depend on the stock market for their retirement security. The threats to 401(k) balances coupled with storm clouds of Social Security make retirement security shakier than before the Great Depression (this is a different story for another time).
This Reckless Recession
I find this potential recession particularly disheartening because it seems so unnecessary. Significant threats to U.S. economic growth have emerged since inauguration day, primarily due to President Trump’s trade war and tariffs on major trading partners, which have increased costs for consumers and businesses.
Jared Bernstein, former head of the Council of Economic Advisers under President Joe Biden, wrote on Monday we may not need to worry too much about a recession. He explained that the labor market remains strong, with unemployment rates at 4%—considered full employment by many. However, job reports are generally lagging indicators, providing a snapshot of past events. When business expectations fall, the initial response is to halt expansion plans and trim investments; labor force reductions typically occur later.
I usually agree with Bernstein, but now, I can’t ignore the five red recession clouds, and I align with The Wall Street Journal‘s assessment: Trump May Wreck the Soft Landing.
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