The risk of US recession

The risk of a recession in the United States has escalated in the wake of the Trump administration’s tariff announcements in early April.

The speed and magnitude of the sell-off in stock markets and associated inversion of the US yield curve reflects intensified anxiety about rising prices, falling demand and supply-chain disruptions.

Economic uncertainty has jumped, and that too can lead to reduced household consumption and lower business investment. Whether the tariff announcements act as leverage to force more open international trade relations, or become permanent, is a source of much uncertainty at present.

Nevertheless, having announced the highest US tariffs in 100 years, confidence in the post-World War II global trading framework has fallen sharply, and the response in financial markets is a natural consequence of that.

Significant

The US National Bureau of Economic Research defines a recession as a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income and other indicators.

First-quarter activity in the US is vulnerable, owing to the front-loading of imports ahead of expected tariffs and the disruption to household consumption from severe weather and the Los Angeles wildfires in January.

The Atlanta Fed’s GDP Now first-quarter growth estimate was, at the time of writing, -2.8 per cent saar (seasonally adjusted annualised rate) . The Dallas Fed’s weekly economic index has first-quarter gross domestic product at 2.3 per cent, but more concrete evidence will be available from the second quarter onwards.

The US economy created 465,000 jobs in the first quarter, and manufacturing activity and factory orders rose in January and February. Real incomes did, too.

Array

An array of forward indicators is pointing to intensified downside risks for US economic activity. The consumer side of the economy accounts for 70 per cent of GDP. Consumer confidence, in particular consumer expectations, has fallen sharply.

The Conference Board’s measure of expectations has fallen from a recent high of 93.7 in November to 65.2 in March, a drop of 28.5. The Conference Board points out when consumer expectations fall below 80.0, which is often a sign a recession may be approaching. This did not hold in the aftermath of the pandemic, but was a reasonably reliable indicator of business cycle downturns prior to that.

ANZ Research also watches the NFIB small business optimism survey closely. From the perspective of the labour market, the annual rate of change in full time employment (FTE) is a barometer of recessionary conditions. According to Bureau of Labour Statistics data, FTE employment stood at 135.1 million in March, up 2.1 million from a year earlier.

Up to the end of March, the labour market showed no evidence of recession. Unemployment has remained low (March 4.2 per cent), and has not satisfied the Sahm Recession Indicator, which signals the risk of a recession when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more, relative to the minimum of the three-month averages from the previous 12 months. Trends in the labour market will be closely monitored to validate current recession fears.

Weekly initial claims data will take on heightened importance in coming weeks. Historically, trend surges in initial claims have reflected rising layoffs, providing an early signal of recession.

It is possible recent labour market data, including initial claims, may be overstating the current strength of the labour market as federal workers who have been made redundant are still counted as employed if they are receiving severance payments

Signs

ANZ Research is alert for signs of a US recession. Before the tariff announcement and pre-February advance trade data release, ANZ Research has forecast US GDP would contract 0.4 per cent, quarter on quarter, in the first three months of 2025. It was expected to settle in the second quarter as net trade improved following the first-quarter driven front-loading of imports.

ANZ Research has forecasts lower consumption growth this year based on elevated uncertainty and some tariff increases. These forecasts also assumed no contribution to growth from government spending this year. This resulted in a 2.0 per cent GDP growth forecast for 2025.

The tariff announcement was larger than expected, thereby raising downside growth risks as well as causing a rapid sell-off in risk assets. Investor and household confidence has been hit, and higher tariffs can erode real incomes and firms’ profit margins.

Brian Martin is Head of G3 Economics at ANZ

This is an edited version of the ANZ Research report “Escalating US recession risks: key indicators”, published April 7, 2025.