Everyone asking the same question, is the U.S. economy heading for a slowdown? Markets are sending mixed signals and analysts are divided, the fear of recession is looming over the second half of 2025. But before we draw any conclusion from the ongoing scenario, let’s dig deeper and analyse all the signs that are happening in the economy and beyond.
We are going to talk about he five economic indicators and interpret them wisely:
1. The Conference Board Leading Economic Index (LEI)
The LEI is one of the most widely respected tools for forecasting economic activity. It combines 10 forward-looking indicators such as new manufacturing orders, building permits, stock prices, and consumer expectations. Historically, sustained declines in this index have preceded recessions by six to nine months.
In April 2025, the LEI declined by 1.0 percent, marking the fifth consecutive monthly drop and pushing the index to 99.4. This is the sharpest single-month decline since early 2023 and reflects growing concerns around weakening demand, tighter credit conditions, and slowdowns in the housing and manufacturing sectors.
While not a recession call in itself, a persistent downward trend in the LEI suggests that the economy is losing momentum.
Key takeaway: Continued monthly declines could indicate that a recession may arrive by late 2025 or early 2026.
2. Yield Curve Inversion and Steepening
The yield curve, especially the spread between the 10-year Treasury yield and the 3-month or 2-year Treasury yields, has long been viewed as a reliable predictor of recessions. When short-term rates exceed long-term rates (known as an inversion), it typically signals that investors expect slower economic growth ahead.
Throughout 2022 to 2024, the U.S. yield curve remained inverted longer than any previous period in history. As of mid-2025, the curve has steepened slightly, with the 10-year yield at 4.51 percent and the 3-month yield at 4.37 percent. This results in a modest positive spread.
However, research shows that recessions often follow shortly after the curve “dis-inverts,” meaning the period after the curve normalizes can be more predictive than the inversion itself. On average, a recession follows about two months after this turning point.
Key takeaway: If the curve continues to steepen, especially sharply, it may indicate that the downturn is closer than many expect.
3. Labor Market Health and the Sahm Rule
The labor market is typically a lagging indicator, but sudden shifts in employment can provide early warning signs. The Sahm Rule, a recession indicator developed by economist Claudia Sahm, looks for a 0.5 percentage point increase in the three-month average unemployment rate compared to its 12-month low.
Currently, initial unemployment claims remain low at about 0.14 percent of the labor force. However, continuing claims have been edging up and currently hover around 1.1 percent. This is still within healthy levels but is trending in the wrong direction.
So far, the Sahm Rule has not been triggered in 2025. But a spike in claims or a rise in the unemployment rate over the summer could signal growing cracks in the labor market.
Key takeaway: Watch for a consistent uptick in unemployment data. If the Sahm Rule is triggered, it may confirm a recession is underway.
4. Consumer Confidence and Sentiment
Consumers drive approximately two-thirds of U.S. GDP, making their confidence a critical variable in any economic outlook. Lower confidence often leads to reduced spending, which can reinforce and accelerate economic downturns.
The University of Michigan’s consumer sentiment index rose by 16 percent in May 2025 compared to its recent lows, suggesting some recovery. However, it remains significantly below pre-2024 levels. At the same time, inflation expectations have cooled, with the one-year outlook dropping from 3.6 percent to 3.2 percent.
This points to improving consumer perception, but uncertainty remains. Factors such as student loan repayments, housing affordability, and energy prices continue to weigh on sentiment.
Key takeaway: A sustained improvement in consumer sentiment could stabilize growth. A reversal, however, would pressure consumption-led GDP expansion.
5. Tariffs, Trade Tensions, and Inflation Effects
Global trade policy remains a wild card in the economic equation. In April, renewed tariff announcements led to a sharp market correction and triggered volatility in several leading indicators.
Trade wars or supply chain disruptions can feed inflation, reduce consumer purchasing power, and damage business investment confidence. As of now, inflation appears to be moderating, but core inflation remains sticky. The Federal Reserve has taken a cautious stance, holding rates steady due to mixed signals from inflation and global risk factors.
Key takeaway: Continued trade disputes or new tariffs could shift inflation expectations and undermine economic stability. Monitor government policy shifts closely.
A Snapshot Summary
| Indicator | Current Status (June 2025) | Recession Signal? |
| Leading Economic Index | 5 consecutive monthly declines | Moderate signal |
| Yield Curve | Recently steepened (positive 14 bp) | Historical recession timing proximity |
| Unemployment Claims | Low, but rising trend | Weakening but not alarming |
| Consumer Sentiment | Recovering, still below baseline | Tentative optimism, fragile mood |
| Trade Policy | Tariffs cause short-term volatility | Potential long-term risk factor |
Reading Between the Lines
Economic data can be noisy and sometimes contradictory. Here’s how to cut through the confusion:
- Focus on Leading Indicators: Coincident data like GDP or jobs often reflect the past. Leading metrics such as LEI and yield spreads offer a glimpse into the future.
- Watch for Convergence: One indicator on its own may not mean much. But when several begin flashing caution at the same time, the signal strengthens.
- Be Aware of Lag Effects: Monetary policy, corporate layoffs, and inflationary impacts often take months to ripple through the economy.
- Understand Market Psychology: Consumer and investor expectations can quickly shift based on narratives. Monitoring how people feel is almost as important as what they do.
- Track Policy Triggers: Trade decisions, stimulus changes, or global shocks can override statistical models.
What to Watch in the Rest of 2025
- New monthly LEI releases: A continued downward trend will raise red flags.
- Treasury yield spreads: An accelerating steepening curve could confirm timing.
- Unemployment claims and monthly jobs reports: Look for trend reversals.
- Sentiment indices: Watch if optimism stabilizes or begins fading again.
- Any shifts in U.S. or global trade policy: Tariffs and sanctions can amplify volatility quickly.
Final Thought
The talk of a 2025 recession isn’t baseless, but it’s also not a guarantee. The indicators present a mixed bag: cautionary signals from the LEI and bond market, but no definitive breakdown in employment or consumer activity yet.
We may be in a late-cycle slowdown rather than a cliff-edge collapse. Still, it pays to remain watchful. The next few months will be critical to determine whether the U.S. economy is heading toward a soft landing, a mild contraction, or something more severe.
Staying informed and reading the indicators in context will help you avoid reactionary decisions and prepare strategically, whatever the future holds.
