Fears of a recession in 2025 grew at the end of April when a key economic indicator, the real gross domestic product, fell by 0.3% in Q1 2025. This compares to growth of 2.4% in Q4 2024.
An informal definition of a recession is two straight quarters of negative domestic growth but a better definition is a significant and persistent decline in economic activity that pervades several economic sectors.
Other economic indicators of a recession include the Freight Transportation Services Index, the Treasury yield curve, and the Conference Board Leading Economic Index.
Recessions can be caused by several factors. A potential recession in 2025 has a different root cause compared to the traditional economic indicators. UCLA’s Anderson School of Management says that tariffs and rising prices from these tariffs could produce “significant contraction” on various parts of the U.S. and global economy.
Keep reading our guide to learn five things to watch in the U.S. economy in 2025 to see if we are heading toward a recession this year.
1. GDP Slid During Q1
The GDP slowed in the first quarter of 2025 because of a sharp rise in imports. Imports are counted against the GDP. Purchasing imported goods indicates that domestic economic activity slowed. The likely cause of this came from businesses increasing their inventories ahead of potential tariffs going into effect.
Government spending also slowed in Q1 2025, due to layoffs, a lack of hiring, and instability in some federal agencies. Less government spending also slows economic activity. People who once earned salaries from government jobs or government funding are no longer spending money on goods and services that drive a consumer-based economy.
Commodity markets are another way to see if a recession is looming. Oil prices are down 16% in 2025 and currently sit at around $61 per barrel compared to a high of $78.71 back on January 15. Commodity prices generally fall during an economic downturn because there is reduced demand from less economic activity.
Even with these economic indicators, some companies just don’t see a recession happening in 2025. Lyft (LYFT) CEO David Risher said its bookings rose in Q1 2025, marking 15 straight quarters of growth. Disney (DIS) stock also rose after a deal to design an amusement park in Abu Dhabi and strong performance on advertising revenue from its live sports broadcasts.
A slowdown in GDP is one major indicator if we are heading toward a recession. But it’s not the only thing to watch for.
2. Weakening Consumer Confidence
Weakening consumer confidence is another sign of a slowing economy. It is lower despite a stronger-than-expected jobs report in early May that said potential job cuts in the government have yet to take hold on the economy.
The U.S. Consumer Confidence Index fell to its lowest level in five years in late April. The Expectations Index, part of the overall CCI, dropped by 12.5 points to 54.4, the lowest level in 13 years. The threshold of 80 or lower usually signals a recession for this metric. The expectation of people getting a job in the next six months was 32.1%, its lowest level since the Great Recession in April 2009.
Businesses and banks examine the CCI closely. It surveys 5,000 U.S. households monthly. The metric gauges whether people are going to spend or save more money over the next six months. Drastic changes by 5% or more in the CCI from month to month can indicate a change in the direction of the economy.
The current CCI indicates people could be saving more money rather than spending it in the next six months. In a consumer-based economy, this is not the rosiest news.
Consumer confidence might rise in the coming months, depending on how prices and inflation rise or lower. And the CCI doesn’t guarantee that we are heading toward a recession. However, it’s one metric to track as you determine how to move your portfolio in the coming months.
3. S&P 500 Lowering
The S&P 500 is an indicator of a recession based on how it performs. Historically, on average, it has returned around 10% annually but the average annualized return of the S&P 500 during a recession is around 1%.
For 2025 YTD, the S&P 500 has slid nearly 4%. The index climbed back up from its low levels in April when stocks dropped due to a presumed trade war and tariffs. So, for the S&P 500 to get out of recession mode, stock prices on this index will have to rise.
Stock prices are not necessarily an indicator of a recession. But it can be a signal of other economic forces at play. How the S&P 500 performs for the rest of 2025 could indicate if we are heading toward a recession.
4. What Will Tariff Policy Lead To?
Tariffs are seen as a potential negotiating tactic to make trade fairer for the United States. Some imported goods generally cost more for businesses when tariffs are implemented. Businesses usually pass these costs onto consumers. A few notable countries, like China, have implemented reciprocal tariffs to retaliate against America’s tariffs on imports in 2025.
Many businesses have seen the prices of their supplies rise. Contrarily, some that manufacture items domestically have had more calls because they might not see the effects of tariffs on imports.
How tariffs trigger a recession depends on how they are implemented and for how long. Permanent tariffs typically raise prices first and cause job losses later. Individuals might spend less money or pull back discretionary spending if prices rise. The corollary to this is that companies might seek cost-cutting measures like layoffs to mitigate smaller sales. Businesses might not grow or innovate, which could lead to stagnant hiring.
Tariffs imposed by the current administration in early April 2025 caused stocks to fall precipitously. The Nasdaq fell 11% in the first week of April. Stocks as a whole lost $6.6 trillion in value in two days, the most in history over a two-day span.
Tariffs are not a surefire sign of looming recession because there are many economic forces at play. But tariffs could signal less consumer spending because of higher prices.
5. Inflation Spikes Higher Than Normal for Long Periods
Tariffs generally cause inflation due to how the United States imports goods and supplies to drive the consumer-based economy. The average annual inflation rate in the United States is about 3.25%. Inflation rates were double that in 2021 and 2022. Those rates have come back down, but tariffs may cause a longer period of higher inflation than what was expected.
Businesses may be forced to raise prices, cut costs, or both. Negative business growth has a ripple effect of less hiring, less purchasing of goods and supplies, and less economic activity. For publicly traded companies, this could mean lower stock prices and less investment.
Some well-known companies, like Best Buy (BBY), AutoZone (AZO), Adidas, and Nintendo (NTDOY), have said they will raise prices of their products in light of tariffs. Businesses have taken to social media to post their receipts from tariff charges. One example is an order for $167K of floodlights from China. The import duty shown on the invoice is more than $255K, which is more than the price of the items in the order.
Although inflation is not a singular cause of a recession, it is something to watch out for. Prices are still relatively high compared to levels in 2019 and 2020. But inflation has slowed for now. If tariffs remain in place for a prolonged period in 2025 and beyond, inflation might rise more.
Are We Heading Toward a Recession? What Experts Say
Having a prolonged period of negative economic activity is not guaranteed to start in 2025. However, many experts have weighed in.
Goldman Sachs on May 9 said that stocks are at risk of a drop of nearly 20% and there is a 45% chance of a recession in the United States in the next 12 months. JP Morgan says the probability of a recession is 60%. A survey of 46 economists conducted by Wolters Kluwer Blue Chip Economic Indicators in early April found that there is a 47% chance of a recession, which was higher than the 25% chance predicted in February.
What’s the best thing to do during a recession with your stock portfolio? Stay the course. The economy historically has always rebounded. The average length of a recession is 11 months and eventually higher highs will be hit if history is a guide.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.