Recession Risk: Is It Going to Happen? Here Are the Key Clues

Key Points

• A recession is defined by two straight quarters of declining GDP, and Q1 2025 is projected to mark the first GDP contraction since 2022.
• Consumer confidence fell by 7% in February, the largest drop since August of 2021.
• The Atlantic Fed’s GDPNow real-time forecasting tool estimated a -1.8 % contraction in GDP, but that estimate is skewed by surging gold imports, which caused a “gold-adjusted” GDPNow estimate of a -0.4 % contraction in Q1.

With the benchmark indices in the red in 2025, the “R” word is popping up again in headlines, recession. The SPDR S&P 500 ETF Trust NYSEARCA: SPY is trading down 3.77%, and the NASDAQ 100, as tracked by the Invesco QQQ NASDAQ: QQQ, is down 5.94% year-to-date (YTD) as of March 21, 2025. While leading on the way up, the computer and technology sector, tracked by the iShares U.S. Technology ETF NYSEARCA: IYW, has been leading on the way down, indicating losses of 8.33% YTD, also as of March 21, 2025.

We covered the crucial 200-day moving average support levels that the benchmark indexes needed to hold, which they broke.

What Is the Real Definition of a Recession?

The tricky thing about recessions is they only occur and can be confirmed in the rearview mirror. A recession is commonly cited as two or more consecutive quarters of negative gross domestic product (GDP) growth. However, the “official” definition as defined by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee is "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales." The NBER takes many more factors beyond GDP into determining and declaring a recession.

Critical Economic Reports Stoking Recession Fears

While recessions are identified after they occur, everyone is trying to get a head start in predicting when one will occur. Economic reports, which are mostly laggard, may provide a clue. Some of the recent negative reports include the New York Fed February Survey of Consumer Expectations, reporting that 27.4% of U.S. households expect to be in a worse financial situation year-over-year (YoY) next year.

While this seems like a small piece out of 100%, it’s also the highest level reported since November 2023, meaning it’s been rising. The Conference Board reported that consumer confidence fell 7% in February to 98.3, which is the largest drop since August 2021.

The NFIB Small Business Optimism index fell 2.1% to 100.7%, indicating business uncertainty reached the second-highest level in 50 years. Debt and credit card spending, as reported by Bank of America NYSE: BAC, fell 2.3% YoY in February 2025 versus a rise of 1.9% YoY in January. Challenger Gray U.S. employer's jobs cuts surged 245% QoQ to 172,017 jobs in February, up from 49,795 in January 2025.

Consumer spending fell 0.9% in January quarter over quarter (QoQ), following an exceptionally strong holiday shopping season in 2024. The market is carefully watching the February to March QoQ results.

The Starkest Indicator of Impending Recession: Atlantic Fed’s GDPNow

If we go by "the two negative GDP quarters" rule of thumb, then there is reason for concern, as evidenced by the Federal Reserve Bank of Atlanta’s GDP Now model, which is a real-time estimate of GDP growth. In the last week of February, the GDP tracker forecast that the GDP would fall 1.5% from the first quarter of 2025, January through March.

However, the estimates had gotten worse as the GDP tracker reported an estimated contraction of -2.8% at its March low and rebounded back to -1.8% on March 18, 2025. Its next reading on March 26, 2025, will set the stage for the first quarter of negative GDP growth under the two consecutive quarter rule of thumb. It would be the first negative GDP quarter since November 2022.

However, Goldman Sachs rebuts the GDPNow forecast, noting that the surge in gold imports is distorting it. The Atlantic Fed acknowledged this and released a "gold-adjusted" version showing a reading of -0.4%.

The SPY Fell Through Its 200-day Moving Average—Time to Be Concerned?

The SPY managed to collapse through its critical 200-day moving average support at $573.08. It fell towards the $551.91 correction threshold, which is a 10% pullback from the highs, and staged a rally all the way up to $570.57 before losing steam. The daily RSI momentum indicator bounced off the 30-band but flattened, indicating that momentum has stalled, either to rest and bounce higher or reverse and fall back down again.

Should the SPY fall back under the 10% correction threshold price level at $551.91, then the Death Cross draws near. The Death Cross officially establishes a breakdown and downtrend formation when the 50-day moving average crosses below the 200-day moving average. While not all Death Crosses result in a recession, recessions can occur after a Death Cross forms in the following months.