Amusing Ourselves in a Dawn of Recession

For Q1 2025, the U.S. Bureau of Economic Analysis (BEA) officially announced that the U.S. has their first contraction of their GDP since the recovery from Covid-19. However, that's not the only concerning fact. Within a couple of months, they already revised the number down to a 0.5% decrease in GDP, 0,2 percentage point lower than their first estimation and Former Federal Reserve economist, Claudia Sahm, said "the downward revision to consumer spending today is a potential red flag." As a common rule of thumb, a recession normally means a decrease in GDP numbers for 2 quarters in a row, so this means the United States is closer to another recession than ever. However, what if we are already in a recession?

In the Dawn of a Recession

Let's take the example of the previous recession. People were aware they were in a downturn around September 2008, after one of the biggest banks in America at that time, Lehman Brothers, fully collapsed. On that day, The Guardian described it as "Heralding a tumultuous day," causing thousands of people to become unemployed and the biggest shock to the financial world in years. 

December 1st, 2008, National Bureau of Economics Research (NBER) officially announced that the U.S. is in recession. If you follow the common rule of thumb, it makes sense because Q4 2008 marked a contraction for two quarters in a row, but the most interesting part is that NBER found that the recession had already started a year ago. December 2007 is found to be the start of the recession and general decline of economic activity, and of course they didn't use the rule of thumb to determine a recession. They didn't just rely on real GDP numbers alone; they also used other metrics like employment, income, and total production the economy made. Because of this, an official announcement of recession can have months, or in this case even a year worth of delay to fully analyze all that data.

Source: How did the recent GDP revisions change the picture of the 2007--2009 recession and the recovery? (BEA, 2011)

When you look at the GDP numbers as well, the BEA continued to revise them downward for 3 years in a row. The graphic shows the lowest trough at the 2008 recession goes from -5,4% from the BEA early calculation to -8,9% at the 2011 revision, showing that the people and even the goverment don't fully understand how bad the situation is in the middle of the recession. 

So are we in a recession? We can only speculate with the data we have, so let's see how we can determine if we are in a recession or not. U.S. LEI or Leading Economic Index is an index released by The Conference Board, calculating 10 leading economic indicators to show where the economy will lead a couple of months in the future. Even though LEI was not used then, the formula could predict the dot-com bubble and the Great Recession. The recession signals have now hit for 3 months in a row, suggesting a growing headwind in the economy. There is also the Sahm rule, another recession indicator that correctly predicted the dot-com bubble and the 2008 recession, where we use the changes in unemployment, so when the unemployment number increases by 0.5% in 3 months in a row, it already happened in September 2024 (Fred, 2025). 

Then what the experts suggest, you might ask. JPMorgan recession probabilities for 2025 are hovering around 40% to 60% for the past couple of months and fully expect at most a weak growth for the rest of the year. Deloitte on their Q2 2025 forecast also predicted the US can fall to recession in 2025 if inflation worsen and trade wars happen.

Slowly Then All at Once

"Even if the economy leads to another downward spiral, life still feels normal so far. I can still enjoy the food I like, go hangout with my friends, and I can still see people around me spending on expensive items. I know overall life becomes more and more expensive, but I don't really think a recession can randomly come tomorrow without a very clear signal, so I can prepare, right?" Someone might assume this is probably the case, yet it's so far from the truth.