6 key recession indicators to watch for
Editorial staff, J.P. Morgan Wealth Management
- The National Bureau of Economic Research (NBER) considers various indicators to determine when a recession occurs but doesn’t have a fixed formula.
- Six key economic indicators the NBER tracks are employment, industrial production, income, consumer spending, business sales and overall economic output.
- The non-profit research organization The Conference Board provides indexes that aim to forecast future economic downturns and track current economic activity.
- As of mid-2025, there are signs of contraction in the U.S. economy, but experts don’t believe signals indicate that the U.S. economy is in recession territory.
Economies ebb and flow, and recessions are an inevitable part of the cycle. While often brief, these downturns can have far-reaching effects that can set economies back for years.
Due to recent market volatility, many investors are wondering if the U.S. economy is in a recession or entering one soon. To better understand the risk, here’s a closer look at recessions and the key economic indicators that determine them.
What is a recession?
A recession is a period of significant decline in economic activity that occurs across an economy and lasts longer than a few months, according to the National Bureau of Economic Research (NBER), the organization that declares U.S. recessions.
While you may have heard that a recession occurs after two consecutive quarters of negative gross domestic product (GDP) growth, that’s not technically true. The NBER doesn’t rely solely on any one indicator or provide specific time requirements for indicators.
Instead, it considers the “depth, diffusion and duration” of an economic contraction by analyzing various economic factors over an extended period. The process takes time, which is why many recessions aren’t often declared until several months after they’ve begun, and sometimes not even until after they’ve ended.
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What causes recessions?
The economy fluctuates between periods of expansion and contraction. However, recessions occur when events shock the aggregate supply or demand, causing economic activity to decline far beyond a typical contraction. According to the NBER, some of the most common causes of U.S. recessions have been mistimed fiscal policy changes, financial crises and housing market crashes.
The most recent recession, for example, hit at the start of 2020 when the COVID-19 pandemic caused economic shutdowns, mass unemployment increases, supply chain disruptions, decreased demand and a stock market crash – though it lasted for just a few months. The recession before that, which lasted from about 2007 to 2009, followed the bursting of the housing bubble and coincided with the American subprime mortgage crisis. Unexpected events like these can throw off the normal economic balance enough to trigger recessions.
What are the main recession indicators to watch?
The NBER doesn’t have a set formula to determine if the U.S. is in a recession, but it does use the following six key economic indicators to help identify recessions.
Employment levels
Employment trends are a core signal of economic health. To gauge them, the NBER looks at the total nonfarm payroll employment and overall employment levels reported by the U.S. Bureau of Labor Statistics (BLS). Rising employment typically indicates growth, while falling levels suggest a contraction.
Industrial production
Industrial production refers to the real output of U.S. factories, utilities and mining operations. For this, the NBER looks to the Industrial Production Index (IPI) reported by the Federal Reserve. When IPI is declining, it suggests that factories are producing less, which can mean reduced demand, an economic contraction or other economic challenges.
Income data
Income data provides insight into the earnings of individuals and businesses. The NBER reviews inflation-adjusted figures on personal income – excluding government transfers – and gross domestic income, both of which are reported by the U.S. Bureau of Economic Analysis (BEA). Declining income in either report is a red flag because it suggests a drop in earnings, which often leads to a slowdown in overall economic activity.
Consumer spending
With consumer spending driving the bulk of the U.S. economy, the NBER tracks the BEA’s report on real personal consumption expenditures. If spending is declining, it can indicate falling consumer demand and slowing economic growth.
Business sales
Sales data from manufacturing and trade industries help gauge real demand in the economy. The NBER uses this data from the BEA to distinguish between falling prices and true reductions in buying activity. When sales are declining, it suggests that consumers and businesses are cutting back on purchases.
Overall economic output
GDP measures the total value of goods and services produced in the U.S. The NBER checks the report on real GDP data from the BEA to assess overall economic performance. A decline indicates that the economy is shrinking.
Key reports tracking recession indicators
While not a completely exhaustive list, the NBER mentions a few key reports when discussing its tracking of economic turning points. There are no fixed rules about which reports are considered to be the most important, but personal income and nonfarm payroll employment have been most heavily weighted over the past decade.
The list includes:
- Declining employment levels: All Employees, Total Nonfarm (BLS), Employment Level (BLS)
- Declining industrial production: Industrial Production, Total Index (Federal Reserve)
- Declining income: Real Personal Income, Excluding Current Transfer Receipts (BEA), Real Gross Domestic Income (BEA)
- Declining consumer spending: Real Personal Consumption Expenditures (BEA)
- Declining business sales activity: Real Manufacturing and Trade Industries Sales (BEA)
- Declining overall economic output: Real Gross Domestic Product (BEA)
Can we predict recessions?
Recessions can sometimes be predicted. The Conference Board, a global non-profit organization, publishes indexes designed to identify the peaks and troughs of business cycles for the world’s major economies.
In the U.S., it provides the Leading Economic Index (LEI), which has been one of the most well-known predictors of turning points in economic activity since it was established in 1938.
Over the last 60 years, a sustained decline in the LEI has preceded all but two U.S. recessions, according to an analysis. For reference, an LEI decline is considered to have entered recessionary territory when it falls more than 4% over a six-month period. However, it’s important to note that while the LEI has historically been a predictor of recession, it is not foolproof. It has missed recessions a few times and can produce false positives.
LEI components and their significance
Today, the LEI is based on 10 components. Here’s what those components are and when they can signal a contracting economy that could lead to a recession.
- Stock market performance: When the S&P 500 stock index decreases it may suggest falling investor confidence.
- Interest rate spread (10-year Treasury bonds less federal funds rate): Short-term interest rates become higher than long-term rates, and the yield curve inverts.
- Unemployment insurance claims (average per week): The number of unemployment insurance claims increases, signaling more layoffs.
- Manufacturing output (average hours per week): Production workers are scheduled for fewer hours, often one of the first signs of slowing demand.
- Manufacturers’ new orders for consumer goods and materials: New orders for consumer goods and materials decrease in anticipation of consumers cutting back on spending.
- Institute for Supply Management (ISM) new order index: The index falls to 50 or less, indicating declining orders over the past month.
- Manufacturers’ new orders for capital goods: Orders for capital goods decrease, suggesting a decreased investment in future growth.
- Building permits for new housing units: The number of residential building permits issued decreases, showing homebuilders expect weaker demand or tougher conditions.
- Leading Credit Index: Lending conditions tighten, making it harder for consumers and businesses to borrow.
- Average consumer expectations: Consumer sentiment drops, suggesting Americans are worried about the economy and may pull back on spending.
The Coincident Economic Index (CEI)
The Conference Board also publishes the Coincident Economic Index (CEI), which is based on four factors the NBER uses to determine recessions: payroll employment, personal income, industrial production, and manufacturing and trade sales. Rather than identifying early signs of contractions, the CEI tracks signs that we’re in a recession. As a result, it can help determine if the current period may later be deemed a recession.
Recession probability estimates
Various leading authorities in the financial space release periodic recession probability estimates. Following these can provide insight into whether a recession may be on the horizon.
Are there any recession indicators in 2025?
The reports tracking NBER’s top economic indicators as of mid-2025 mostly point to growth, with a few signs of slight slowing or plateauing.
The CEI increased by 1.1% over the six-month period ending in April, signaling growth. However, the LEI dropped by 1% in April, pointing to a contraction. While a relatively big drop, the decline over the six months ending in April 2025 is just 2% – still below the 4% threshold typically associated with recessionary territory.
Overall, there are signs of a contraction, but not of widespread declines that are required for the NBER to declare a recession.
J.P. Morgan Wealth Management sees recession probabilities hovering around 30% as of June 2025. Keep in mind that could change over time.
The bottom line
Identifying if the U.S. is in a recession is tricky because the NBER doesn’t provide a specific formula or threshold. Furthermore, recessions aren’t typically identified until several months after they’ve begun or ended. However, past recessions and the above indicators can help you better understand when one may be coming or if one is occurring.
Frequently asked questions about recession indicators
The Sahm Rule recession indicator is used to warn against the potential onset of a recession. It’s triggered when the three-month moving average of the national unemployment rate increases at least 0.5 percentage points above its low during the previous 12 months.
The lipstick index is an economic theory suggesting that sales for “affordable luxury” items, such as lipstick, increase when a recession is looming. The rationale behind it is that while larger purchases may become too expensive, there’s a period where consumers can still spring for small luxuries that make them look and feel better.
While not tracked by NBER, some of the weird recession indicators rumored to have been used over the years are increases in the sales of lipstick, men’s underwear, champagne, workplace refrigerator fullness, rising divorce rates and the hemline index. The hemline index theory suggests that shorter skirt hemlines reflect a more optimistic and carefree mood, while longer ones mirror a more cautious and somber atmosphere.
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Editorial staff, J.P. Morgan Wealth Management
