US Recession Monitor – Economy entered 2025 on solid footing

A number of recession warnings were flashing yellow and red last year, but the economy didn’t falter and entered the year on solid ground. Our internal business cycle indicator and recession models underscore our upbeat outlook even though the economy is bifurcated, as manufacturing is struggling and housing is feeling the pressure of high interest rates.

What you will learn:

• The December employment report signals there is little risk of a sudden deterioration, with layoffs low, a decent breadth of job growth, and rising real wages. While the labor market isn’t booming and conditions are tough for those unemployed, there isn’t anything flashing recession.
• The bond market continues to be whipsawed by policy speculation and employment and inflation numbers. Incoming data hasn’t convinced us to remove a rate cut in March from our baseline, and if monetary policy follows our baseline, long-term interest rates should edge lower this year.
• A trade war with Mexico and Canada is a key risk to the outlook after remarks made by President Trump. We simulated a large tariff increase on Canada and Mexico and it would cause a big hit to the US economy. But we believe this is a bargaining salvo, rather than policy.