There is no standardized definition of a recession, but the one used by the National Bureau of Economic Research (NBER) works well. The NBER states that “a recession involves a significant decline in economic activity that is spread across the economy and lasts more than a few months.” This means the economy actually shrinks. Fewer people have jobs, businesses use fewer factories and buildings, and there is less income and output being produced as a result.

It is often said that a recession is two straight quarters of contraction in real (inflation-adjusted) gross domestic product (GDP), where GDP is the value of all final goods and services produced in the United States. But that’s not quite right. For example, GDP did not fall for two straight quarters in 2001, yet it is widely acknowledged that that there was a recession in that year. The NBER (which has become the near-official arbiter of recession dating for the United States) identifies a range of measures they use to define a recession including the following: real personal income less transfers (a measure of market-based incomes), nonfarm payroll employment, employment levels reported in household surveys, inflation-adjusted personal consumption expenditures, wholesale and retail sales, and industrial production.

We should note how unusual it is to have any outright contraction of economic activity. Take GDP growth as an example. Quarterly data on real GDP has been collected since 1947, and as of the end of 2024, there were 311 quarters of GDP data, but only 44 of these saw contractions in GDP.

Recent concerns about recession are 100% driven by poor policy decisions from the Trump administration. The macroeconomy was in an extraordinarily strong and stable state when it was handed off to the Trump administration. The historically high and broad tariffs the Trump administration has repeatedly threatened since early March would, by themselves, pose a recessionary threat to the economy. The chaotic way the administration has rolled out, retracted, changed, paused, and re-upped the tariffs have made things even worse by creating mammoth economic uncertainty as well, which nearly all economic observers think will lead to sharp contractions in several kinds of economic activity.

Figure A shows Google search trends for recessions, along with the dates of various tariff announcements.

The International Monetary Fund said the following about global growth prospects in January 2025 (before President Trump’s inauguration):

The forecast for 2025 is broadly unchanged from that in the October 2024 World Economic Outlook (WEO), primarily on account of an upward revision in the United States offsetting downward revisions in other major economies…. Upside risks could lift already-robust growth in the United States in the short run, whereas risks in other countries are on the downside amid elevated policy uncertainty.

In April of 2025, a revision to these growth forecasts noted the following about the negative effects that the new tariffs would have:

Since the release of the January 2025 WEO Update, a series of new tariff measures by the United States and countermeasures by its trading partners have been announced and implemented, ending up in near-universal US tariffs on April 2 and bringing effective tariff rates to levels not seen in a century (Figure ES.1). This on its own is a major negative shock to growth. The unpredictability with which these measures have been unfolding also has a negative impact on economic activity and the outlook and, at the same time, makes it more difficult than usual to make assumptions that would constitute a basis for an internally consistent and timely set of projections.

Further, on April 9, the Goldman Sachs macroeconomic forecasting team moved their baseline scenario for the next year to recession, based on announcements of the “Liberation Day” tariffs. When the Trump administration announced a pause on tariffs, the forecast changed back to just under 50% chance of recession.

In short, there is universal agreement that the Trump tariff policy is bad for growth in substance and in implementation, and that this policy is driving increased risk of recession.

On top of the botched tariff policy, the other big threat to growth in the near term is a similarly chaotic effort to destroy capacity in the federal government. The administration has rolled back or ended federal employment and grants in numerous extralegal ways. These cutbacks could eventually be large enough to weigh on growth in the short term, and they will absolutely reduce longer-run growth as key public goods and services that complement private-sector growth-generating activities are no longer provided. Further, many of the key functions being hamstrung by recent cutbacks involve surveillance of potential economic risks—either financial, epidemiological, or climate-related. Impaired surveillance could well mean future risks (say of cascading bank failures or of another pandemic) wouldn’t be anticipated, and there wouldn’t be sufficient time to mount a strategic response, further harming growth.

All the uncertainty associated with bad policy implemented chaotically has led to the highest economic policy uncertainty readings since the beginning of the COVID-19 pandemic. This uncertainty is poison for all sorts of high-stakes spending decisions from businesses and households, and so these decisions will be deferred, and economic activity will begin contracting.

So far, the core data normally used to declare recessions have not signaled that a recession has begun. This could take a number of months (see answers to the questions below that talk a bit more about this data). But other data, often sentiment-based, is strongly signaling that a recession is very likely.

Most U.S. families depend on earning money in the labor market to live. When the labor market is unhealthy, jobs are scarce, unemployment is high, and the leverage needed to secure wage gains is damaged, resulting in great harm to these families.

The contraction of economic activity caused by recessions leads directly to impaired labor markets. Because of the march of technology and know-how and the greater skills acquired every year by U.S. workers, over any typical stretch of time, it is possible to produce the same amount of goods and services from one year to the next with about 1.5% fewer workers. In the jargon of economists, productivity—the amount of income and output generated in an average hour of work in the economy—rises continually, and this means that unless we produce more every year, fewer hours of work are needed.

If total output was flat from one year to the next, a 1.5% reduction in the number of workers needed to produce it would imply roughly 2.5 million workers were no longer needed. This means even flat growth of output could idle a large-enough number of workers to equal the entire population of Chicago (a small part of adjustment in the labor market could come through reduced average hours of work rather than fewer hours). An outright contraction of output growth (like what occurs in a recession) would obviously be much worse.

As fewer workers are needed when recessions cause a contraction of output, this means unemployment rises and employment falls. This leads to sharp reductions in family incomes as people are working less, and it means many nonwage benefits like health insurance coverage are lost. Further, higher unemployment robs even workers who remain employed of the ability to demand and secure higher wages.

Additionally, the point when an economy officially exits a recession and begins recovery is not the point when the labor market is restored to full health. Labor market health is only restored when pre-recession lows of unemployment and highs of employment are restored. While growing output will boost demand for workers and, hence, reduce unemployment, a full restoration to pre-recession unemployment levels can take quite some time. For example, the 2007 low point of unemployment was only regained in 2017, fully eight years after the official end of the recession of 2008–2009. Ending recessions is a key first step to alleviating suffering, but then fostering a very rapid recovery (like the one fostered after the COVID-19 recession) is also crucial.

The question of whether a recession is coming is not a technocratic curiosity since a recession means the lifeblood of every U.S. family’s income is threatened.

There can be seemingly many causes of a recession, but the ultimate channel through which they cause a significant and widespread downturn in economic activity is reduced aggregate demand. Aggregate demand—the sum total of spending on finished goods and services in the economy—is measured by Gross Domestic Product (GDP) and is divided into four categories, any of which may lead to economic contractions:

• personal consumption (spending by households for current consumption)
• private investment (spending by businesses on structures, equipment, or intellectual property products, and spending by households on residences)
• government expenditures on goods and services (this includes spending on salaries of government employees, but not transfer payments like Social Security, which are counted under personal consumption or private investment)
• net sales of U.S. products to foreigners (exports minus imports)

Aggregate demand weakness can originate in any one or more of these sectors and can readily spill into the other buckets. Spillovers occur because individual economic behaviors are linked together both by far-reaching webs of promised or expected payments between people and businesses, as well as socially formed expectations for future economic conditions—notions first popularized by economist John Maynard Keynes (1936) that continue to motivate debates in economic theory and policymaking.1

For example, a collapse in housing investment following a real estate investment bubble resulted in a recession and ensuing financial crisis from December 2007 to June 2009 when consumption and investment subsequently fell. Sharp interest rate hikes from the Federal Reserve, which increased borrowing costs for consumers and businesses in the U.S. and around the world, caused back-to-back recessions spanning January 1980 to November 1982. A spike in global oil prices engineered by the Organization of Petroleum Exporting Countries in October 1973 caused a recession from that November to March 1975.

Each recession is unique in its immediate causes, but all share the problem that the actual and expected disruption of this web of payments can cascade and turn a downturn in one component of GDP into a downturn in other components. For example, as home prices fell and employment in construction tanked in the U.S. in 2006 and into 2007, the newly unemployed workers cut back on their consumption spending, which reduced demand for output in nonconstruction sectors. As consumption spending began slowing, prospects for future business investment deteriorated, so businesses pulled back on the construction of new buildings and factories and the purchase of equipment, further amplifying the initial downward impulse to aggregate demand.

Although a recession may originate in any of these components of GDP, a downturn in private investment is often the main culprit. Even though personal consumption spending comprises a much larger share of GDP (typically accounting for about 68% of national income), it tends to be more stable relative to investment for a couple of reasons. First, with basic family budgets often exceeding income, most families are income constrained and must spend every last dollar of their disposable income to make ends meet. Second, macroeconomic “automatic stabilizers”—such as unemployment insurance and supplemental nutrition assistance programs that provide income support to people experiencing economic hardship—help families maintain consumption even when suffering lost jobs and income, helping maintain total consumption in the macroeconomy (This is true even as U.S. automatic stabilizers are underpowered and could use significant reform to make them even more protective against recession).

Private investment, on the other hand, is more prone to disruption, which is why policy responses to economic downturns often focus on stabilizing investment and financial systems. In essence, private consumption is mostly a function of current income, a knowable and well-defined quantity. Private investment is mostly a function of expectations of what incomes (and, hence, demand) will be a number of years into the future. These expectations can turn rapidly and are plagued by far more uncertainty, making this component of GDP more volatile.

The key threat to business investment now is the high level of uncertainty caused by Trump administration policies, and the fact that high and broad tariffs might necessitate a substantial and costly uprooting of current supply chains, that fiscally irresponsible tax cuts might push up interest rates and debt servicing costs while reigniting inflation, and that sharp cuts to social spending will weaken consumer spending. Further uncertainty about the scale of deportations and the cuts to federal government capacity and the irreplaceable role it plays in supporting private economic activity are also likely to contribute to investment slowdowns.

Notes

1. Minsky 1986 provides a modern interpretation and expansion of Keynes’ ideas of business cycles and policies to manage them.

As noted above, recessions happen when aggregate demand (the combined spending of households, businesses, and governments) is too low to keep all productive resources (labor and capital) in the economy employed. The optimal policy response to recessions is taking measures that boost aggregate demand to reactivate these idled resources.

The two main levers to boost aggregate demand are monetary and fiscal policy. Monetary policy to fight recessions consists of the Federal Reserve cutting interest rates. There are a few ways the central bank can do this. The Fed can either cut interest rates directly through the short-term policy rates they control or indirectly by purchasing longer-duration assets (sometimes known as “quantitative easing”) and by engaging in public communication that convinces bond markets that these longer-term rates will be kept low in the future (sometimes known as “forward guidance”).

Fiscal policy to fight recessions consists of either tax cuts or spending increases to boost demand. By far the most effective fiscal policy measures are those that maintain or expand government spending directly, or that boost resources (either in the form of tax cuts or direct spending) to income-constrained households and state and local governments to keep their spending from falling. Tax cuts that deliver higher disposable income to more affluent families are deeply inefficient as recession-fighting tools since richer families save a large portion of any extra money they get, and the point of fiscal policy measures to fight recessions is to spur spending, not saving.

In recent decades monetary policy has had limited traction in fighting recessions. Now, however, with interest rates starting from a higher level than has been seen since the early 2000s, there is more room for the Fed to provide a significant boost to aggregate demand.

But efficient fiscal policy measures generally have much more traction than monetary policy in ending recessions and quickly restoring the economy back to full health. As the 2021–2024 experience showed, fiscal policy measures at the scale of the aggregate demand shortfall will almost always reliably push the economy rapidly out of recession and back to full employment.

If a recession hits in 2025, the Fed should cut interest rates, and Congress and the Trump administration should use effective fiscal policy measures:

• directing aid to income-constrained households (and not to more affluent households) through enhanced unemployment insurance, nutrition assistance, and Medicaid eligibility
• directing aid to state and local governments to keep them from cutting spending as their own tax collections fall
• continuing (or even increasing) investments in infrastructure started under the Biden administration

Permanent tax cuts that mostly flow to affluent families should be rejected as worse than doing nothing. They will have only weak effects in helping pull the economy out of recession, and they will further lock in too-high deficits and too-low revenue once the recession is over.

Finally, the central problem of recessions is that aggregate demand is too low relative to the nation’s productive capacity. There is one way to reduce this productive capacity that can ameliorate recessions and potentially spread their pain more equitably through the economy: Institute work-sharing programs that reduce average hours of work instead of reducing employment. There would still be economic pain felt if work-sharing were a main method of adjustment to a recession and its aftermath, but instituting work-sharing would lower unemployment faster and spread the pain more widely rather than concentrating it acutely on workers who, otherwise, would have lost all access to work. Work-sharing to spread pain more widely and to bring productive capacity down closer in line with aggregate demand is not a perfect substitute for measures to boost aggregate demand, but it can complement them.

It is crucial to remember that ending a recession is just the first step in helping U.S. families. Even after output begins growing again and the recession officially ends, unemployment can remain far higher than its pre-recession levels. Labor market distress can continue far into a recovery phase. Restoring full pre-recession labor market health, not just ending an official recession, should be the real goal of policymakers.

The drivers of the current coming recession—broad and historically high tariffs and steep federal cutbacks, both delivered through chaotic and possibly illegal means—will also drive consistently slower growth once the recession is over. High universal tariffs will lead to misallocated investment and higher prices throughout the economy, and federal cutbacks deprive the economy of a crucial input into long-run growth—public goods and services that complement private-sector activity. In a sense, the depressing effects of both tariffs and federal cutbacks will first happen very quickly, but then steadily and slowly over decades if they are not rolled back. These long-run growth-depressing effects will be harder to see and recognize in any given year but will actually impose a greater cost than a near-term recession would.

As of May 2025 these standard indicators are not strongly signaling an imminent contraction. Table 1 shows a number of indicators used by the National Bureau of Economic Research to define recessions. It shows how these indicators slowed in the six months before the last two recessions before COVID-19 and then compares their pace of growth since January 2025 relative to their pace in 2024.

In the last two nonpandemic recessions, growth in nearly all indicators slowed sharply in the six months before a recession hit. Since January 2025, of the 10 indicators for which data are available, growth has slowed in six and has not improved at all relative to 2024 for two indicators. Two indicators have seen faster growth so far in 2025 than in 2024.

So far, while more indicators are slowing in this table than not, without other information (discussed in more detail in the following question), this table would not generally raise huge concerns about a coming recession. But these indicators certainly bear watching.

Another commonly referenced recession predictor is the “Sahm rule” (when the rolling three-month average of the unemployment rate exceeds the lowest point this measure reached over the past 12 months by 0.5 percentage points, this often predicts a recession). The Sahm rule has already triggered one “false positive” in the past couple of years, but is not signaling a recession now (see Figure B for the Sahm indicator and thresholds).

Despite the mixed data in Table 1, today’s recession fears are far from groundless. Clearly destructive policy changes (the shrinking of the federal workforce, cuts to government programs, historically high and broad tariffs, and threatened mass deportations) are happening fast. They are also being implemented in highly chaotic ways, causing economic policy uncertainty to rise sharply. While widespread economic distress has not yet shown up in the “hard” data surveyed in Table 1, “softer” economic measures show reasons for grave concern.

Soft indicators tend to rely on consumer or business sentiment rather than on actual outcomes. For instance, data from the University of Michigan’s consumer confidence survey show a worsening of unemployment over the next year, but, as of early May, the hard data released in the Bureau of Labor Statistics’ monthly jobs report have yet to pick up this recession signal with an increase in measured unemployment.

Similarly, business surveys asking about investment plans over the next year have turned highly pessimistic. In the April 2025 release of the Empire State manufacturing survey of the Federal Reserve Bank of New York, both new orders and average workweeks fell. The expectations for general business conditions fell more sharply than in any other month of the survey except for September 2001. The April 2025 release of the Federal Reserve Bank of Philadelphia Manufacturing Business Outlook survey revealed that more than a third of manufacturers reported cutting back on new orders.

Why haven’t these sentiment-based data translated into clearer deterioration in the hard data? Economic data move with substantial lags, and often it takes a lot of time to even realize the economy has entered a recession. Because the last “normal” recession the U.S. experienced was in 2008, many may have forgotten the slow pace of economic contraction. In that recession, the NBER business cycle-dating committee didn’t officially stamp the start of the recession until the end of 2008, when the prior labor market peak was announced as December 2007.

The recession resulting from the COVID-19 pandemic was extreme in many ways, including how rapidly it occurred and then appeared in the data.

While the fingerprints of recent policy decisions are clearly showing up in the soft data, it may take time for them to hit the overall labor market measures, at least at the national level. The policy shock has been very, very sudden, but the economy is enormous like a cruise ship, so it takes a while to see the widespread impacts. But the wheel has absolutely been turned. Unless there is a dramatic shift in the current policy agenda, we will likely start to see measured weakness in upcoming labor market data in the coming months.

The labor market is the main source of income for low-income families, and higher unemployment during a recession causes reductions in annual earnings, pushing more families below poverty income thresholds.

Figure C uses annual state-level data to show that higher unemployment rates are associated with higher poverty rates. In particular, a one percentage point increase in unemployment typically leads to a 0.6 percentage point increase in the standard poverty rate, or about 2.1 million additional people in poverty according to recent data.2

However, poverty rates are less likely to rise when there is stronger fiscal support to combat a recession, particularly when the fiscal support is targeted directly at lower-income households. This happened most recently during the COVID-19-induced recession in 2020 when expanded unemployment benefits, higher child tax credits, cash payments, and low interest rates directly benefited families and kept aggregate demand high. The annual unemployment rate more than doubled between 2019 and 2020, but the standard poverty rate based on pre-tax money income only rose by 1.0 percentage point. The supplemental poverty rate, which includes post-tax income, fell by 3.9 percentage points between 2019 and 2021, and only rose in 2022 after many of the COVID-19-related supports expired. Further, by the end of 2021, unemployment rates nearly returned to pre-recession levels.3

Notes:

2. A regression of state-level official poverty rates on unemployment rates from 1978 through 2023, with state and year fixed effects, weighted with mean state age 16 and over population levels, yields a coefficient of 0.623. In 2023, the poverty rate was 11.1%, and the poverty level was about 36.8 million people, so a 0.623 percentage point increase in poverty is equivalent to about 2.1 million people. Poverty rates, unemployment rates, and civilian population levels are available from the EPI State of Working America Data Library, retrieved May 9, 2025.

3. Official and supplemental poverty rates are available from the EPI State of Working America Data Library, retrieved May 9, 2025.

Due to discrimination and other structural inequalities in the labor market, Black and Hispanic unemployment rates are consistently higher than white unemployment rates. Black workers have unemployment rates that are twice as high as their white counterparts, and the 2:1 Black-to-white unemployment rate ratio implies that Black unemployment rates soar during a recession. Figure D shows that in every recession over the last four decades, Black and Hispanic workers have experienced a much larger fall in employment than white workers. During the Great Recession, for example, the Black prime-age employment-to-population ratio (the share of adults between the ages of 25 and 54 with a job) fell by 7.4 percentage points, while the white rate fell by 4.3 percentage points.

Moreover, Black workers experience higher unemployment for a longer period relative to white workers. White unemployment began to fall 19 months after the technical end of the Great Recession in June 2009, but Black unemployment only began falling after 26 months. Relative to their white counterparts, Black workers experienced higher unemployment rates, which have taken longer to fall in every recession since the 1980s. When there is a negative economic shock, Black workers experience larger declines and slower recoveries of prime-age labor force participation and employment rates. In addition, Black workers who remain employed see disproportionately lower wage growth than white workers during periods of higher unemployment.