Trumpcession: Signs of a U.S. Recession 2025? (Part 1)

Mar 20

3 min read

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The U.S. markets have been showing some unsettling signs lately, haven't they? We've seen a clear downturn since January 2025, with the Nasdaq, S&P 500, and Dow Jones all declining. This market volatility, coupled with anxieties about potential tariffs, has understandably created a sense of unease among investors. So, the big question is: are we headed for a recession?

Key indicators

Line chart showing the spread between the 10-year and 2-year U.S. Treasury yields from 1980 to 2025, with shaded areas indicating recessions. The spread turns negative before most recessions, signalling yield curve inversion. — Yield curve inversion (10y-2y spread) often precedes U.S. recessions, as shown by shaded areas on the FRED chart.

Graph titled "Normal Yield Curve" showing an upward-sloping line where yield increases with bond maturity, representing typical economic conditions. — A normal yield curve shows higher yields for longer maturities, reflecting investor expectations of economic growth.

One of the most closely watched signals pointing towards a potential economic downturn is the inverted yield curve. To understand this, think of a yield curve as a graph that plots the yields of bonds with different maturity dates. Normally, you'd expect longer-term bonds to offer higher yields than shorter-term bonds. This is because investors demand a higher return for locking up their money for longer periods, to compensate for inflation and other risks. So, a normal yield curve slopes upwards.

Graph titled "Inverted Yield Curve" showing a downward-sloping line where short-term yields are higher than long-term yields, often a sign of an upcoming economic recession. — An inverted yield curve occurs when short-term yields exceed long-term yields, often signalling a potential recession.

However, when investors become concerned about the economy's future, they tend to flock to safer, long-term bonds. This increased demand drives up the price of these bonds, and since bond prices and yields move inversely, it lowers their yield. At the same time, short-term bonds become less attractive, leading to lower prices and thus, higher yields. Consequently, short-term yields can climb above long-term yields, inverting the curve.

Historically, this inversion has been a pretty reliable predictor of recessions. In fact, every time we've seen a significant yield curve inversion, a recession has followed within 12 to 18 months. It's like the market's way of flashing a warning sign – a sign we can't afford to ignore.

Adding to the unease are the Federal Reserve's recent interest rate adjustments. While rate cuts are often seen as a stimulus, they can also signal the Fed's acknowledgement of economic weakness. Historically, when rate cuts coincide with an inverted yield curve, recession risks escalate significantly.

Line chart showing the U.S. Federal Funds Effective Rate from 1955 to 2025, highlighting peaks in the 1980s and recent rate hikes, with shaded areas denoting recessions. — Chart showing the historical trend of the Federal Funds Effective Rate, reflecting U.S. monetary policy shifts and responses to inflation and recessions.

And here's another thing to consider: a recent Deutsche Bank markets survey placed the probability of a U.S. recession at nearly 50%. This figure highlights the growing consensus among market analysts that a downturn is increasingly likely.

Other Indicators

Beyond the yield curve and interest rate concerns, other economic indicators are flashing warning signs. Consumer confidence has been steadily eroding, plummeting to 57 points in March, reflecting a growing sense of unease. Manufacturing PMI contracted to 49.8 in March, signalling a slowdown in industrial activity.

Furthermore, long-run inflation expectations have been revised upwards to 4.1%, suggesting persistent inflationary pressures. And while still historically low, the unemployment rate ticked up to 4.1%, accompanied by a decline in the labour participation rate, both indicating a weakening labour market.

These converging factors paint a concerning picture of an economy struggling to maintain its footing.

Trump's Tariffs

Now, what's driving this? Trump's tariff policies are raising eyebrows, with some economists fearing they're a fast track to recession. Is it a trade masterclass, or just a chaotic experiment? Time will tell, but investors aren't exactly thrilled with the suspense.