Why is the "R" word back?

There’s a word most economists – indeed, most people – don’t want to hear, and it begins with an “r.” I’ll give you time to count to five for a guess;  1, 2, 3, 4, 5.  Buzz, time’s up.  The word is “recession,” and I expect most of you guessed correctly.  Yes, after being out of the headlines for most of the past year, the R word, recession, is making a comeback in the news.

Indeed, one economic measure designed to predict recessions has been suggesting a recession is ahead. Another forecast doesn’t go that far but is predicting the economy will shrink in the first quarter (January to March) this year.  A “rule of thumb” used by economists says a recession is occurring if the economy shrinks for two consecutive quarters, that is, for six months. 

So, while there’s no firm evidence we are currently in a recession, there are enough worries about the economy that the question cannot be discarded.

The starting point is to look at economic trends. The broadest measure of the economy is “real gross domestic product,” or GDP for short. Translated, GDP measures the value of all economic production, including products and services, in the economy over a period of time. The latest reading is for the end (4^th quarter) of 2024.  That rate was positive, meaning the economy expanded but at a slower pace than in the previous quarter.

Consumer spending drives the economy. In January consumer spending dropped for the first time in almost two years, even after taking out inflation, which increases spending, as well as after adjusting for the typical pullback in spending following the holiday buying season.  The reduction wasn’t large, but it was surprising because after-tax consumer income rose by a healthy amount. Another worry is consumer debt has been trending higher.

Of course, the job market is one of the key pieces of our economy, and likely the part most followed by people.  The nation has continued to add jobs at the beginning of 2025, but the pace of job growth has been slower than at the end of 2024.  There’s also been a slight upward trend in the jobless rate since mid-2023, with the rate rising one-half percentage point to just over 4%. Perhaps more concerning, job layoffs have been higher in recent months, job openings have declined, and new unemployment claims have moved up.

There’s also been concerning news on the inflation front.  During the summer of 2022 the annual inflation rate hit a forty year high of over 9%.  But over the next two years there was significant progress in reducing this rate.  Indeed, in September 2024 the annual inflation rate was only 2.4%, very close to the Federal Reserve’s goal of 2%. Unfortunately, since then the progress in reducing the inflation rate has stopped; in fact, it has reversed. Early this year the pace of annual price increases jumped to 3%. Since the Federal Reserve (the “Fed”) usually only reduces interest rates when they are satisfied the inflation rate under control, the Fed did not lower interest rates at their January meeting.

What people think about the economy is also very important.  If people are confident the economy is doing well, they are more likely to spend, and businesses are more likely to hire.  But if confidence falls, the opposite can happen – spending and hiring can both fall.  Unfortunately, there was a large drop in consumer confidence in February which sparked many to be concerned about where the economy is going in 2025. 

So, with all this somewhat apprehensive news, is a recession a “sure thing” in 2025?  Thus far, polls of economists say “no.”   Only about one-third of economists are predicting a recession in 2025.  While this is good news, the percentage was only 25% about a month ago. But, what more economists do agree on – by a rate of over 50% - is that the economy will grow slower in 2025.

There is a big difference between a recessionary economy and a slower-growing economy.  A recession means the economy is shrinking, particularly in terms of the production of goods and services. A slower-growing economy indicates there is still expansion in terms of the production of goods and services, but the rate of improvement is lower than it had been.  In short, a recession means we’re falling behind, whereas a slowdown means we’re still moving ahead, but not as fast.

Recognize, however, there can be similarities between recessions and slowdowns, particularly in the job market. In both, jobs can be cut, the unemployment rate can rise, and the number of people who want to work but can’t find jobs can increase.

Even while most economists are not now predicting a recession, there is a policy most are worried about which could cause a recession.  That policy is tariffs. While tariffs could have positive results by motivating companies to hire and make products in the US rather than in foreign countries, accomplishing this is not a short term process.  It can take years. In the meantime, economists worry tariffs can increase prices and disrupt supply chains.

Furthermore, if foreign countries respond to US tariffs by raising their own tariffs on US-made products, US companies can lose sales and hence cut back on production and employment.  The potential result is a recession. The fear of a tariff-induced recession is probably the best explanation for why the “R” word has returned. These fears have also been reflected in recent large pullbacks in the stock market.

The current conclusion is the economy is still growing, but the pace of growth may be slowing.  Yet slower growth is not a recession.  Instead, what has been worrying economists and investors is tariff policy, and where that policy is headed. Until that question is answered, most of us will be trying to decide if the “R” word is something we should be worried about

Walden is a Reynolds Distinguished Professor Emeritus at North Carolina State University.