Recession is a label. What matters is whether high gas prices, market volatility, and economic anxiety finally hit consumer spending.
KEY TAKEAWAYS
Recessions are labeled after the fact; real-time signals come from prices, markets, and financial conditions. What matters is the direction of activity, not the official designation.
Consumer spending drives roughly 70% of GDP, making it the primary transmission channel from economic stress to slowdown. Changes in behavior, not sentiment alone, determine economic outcomes.
GDP growth estimates have declined meaningfully but remain positive, indicating deceleration rather than contraction. The trend is weakening, even if the level has not yet turned negative.
Recession probability models and prediction markets are rising, signaling increased risk but not certainty. These measures are directional indicators reflecting evolving data, not definitive forecasts.
Bond market reaction to Powell’s Harvard comments suggests the Fed is prioritizing labor market risk and avoiding overtightening into a slowdown. Rate expectations have shifted, indicating flexibility in policy if conditions deteriorate.
Morningstar and similar aggregated data sets continue to show mixed signals across sectors and asset classes. Dispersion beneath headline indices reflects underlying stress even when broader benchmarks appear stable.
MY HOT TAKES
The term “recession” is less important than the underlying drivers of economic activity. Labels do not change outcomes; behavior does.
The consumer is the deciding factor; continued spending can offset negative signals. Economic resilience depends on whether spending patterns hold.
Psychological pressure from prices and markets is the key variable that may shift behavior. Perception often leads data in shaping economic cycles.
Monetary policy is limited in addressing supply-driven inflation like energy shocks. The Fed can influence demand but not directly resolve cost-side pressures.
Focus should be on the sequence: costs → sentiment → spending → growth. That chain determines whether slowdown becomes contraction.
You can quote me: “The American consumer has a remarkable historical tendency to outrun the forecast.”
What’s in a word? Have you ever lived through a recession? Come on, of course you have, but I have an important question for you. Did you know you were in a recession at the time? Did you ever wonder how a recession gets the distinction? I don’t want to get too deep into the hows this morning, but I do want to spend a bit of time getting into the mechanics of a–let’s call it–economic slowdown.
There has been a lot of banter in the recent market narrative about some of the headwinds encountered by the US Economy, and yes–you, the consumer. Let’s start with the obvious that prices of many things are just too damn high. Adding to that is spiking oil prices which have ratcheted gas prices higher with the national average now sitting at $5.45 a gallon as of this morning. You feel that, right? I certainly do, and I don’t even really drive. In other words, I pass by gas stations and I instinctively look at the prices and when I see them higher, something deep inside of me gets a twinge of nervousness.
How about stocks? They are down year to date and very, VERY volatile. You have presumably checked your account recently–perhaps reluctantly. If you have, I would be shocked if it was up on the year. You have heard that interest rates are higher, and that can’t be a good thing…unless of course you are buying fixed income. That said, it is true that borrowing rates are higher than they were, say, a few months ago. Similar to gas prices, even if you are not in the market for a new mortgage or car loan, knowing that mortgage rates are higher has a psychological effect on you.
Of course, you can’t miss the geopolitical uncertainty that seems to be snowballing on a daily basis. The media–because that’s their business–is keen to keep you focused on it, the wilder it is, the better their performance. I mean, you can’t just keep showing loops of bombs blowing up trucks and boats.
Ok, let’s be clear–without getting too much farther down a rabbit hole–there are lots of very real challenges facing economic growth right now. If any or all these highlights I just mentioned have caused you in any way to change your consumption habits–well my friends–we may be in for some pain. There it is…consumption. My long time followers know of my obsession with consumption–almost 70% of GDP growth. There it is, GDP growth. Negative growth is the prerequisite for the title of “recession.” Specifically sustained negative growth, like 2 consecutive quarters. Our latest was paltry and it was revised significantly down. Certainly not good news, but certainly not… well, negative either. So, really, where are we? Let’s zoom out and see if we can get some clarity on this.
The most honest answer I can give you this morning comes from a model, not a pundit. The Atlanta Fed's GDPNow tracker. I have covered this with you before. It’s a real-time mathematical estimate built entirely from incoming economic data, with no human thumb on the scale. It opened the first quarter of 2026 predicting a 3.1% annualized growth. It has since dropped to 2.0% as of its March 23rd update, the last one before tomorrow's revision. That is a 35% decline in the estimate in just five weeks, on data that does not yet fully capture the cumulative oil shock from the Iran conflict. Importantly, we are not negative. But also importantly, we are moving in one direction, and it is not up. Let’s call that a data point.
Now here is where I want to give you the number that stopped me cold when I read it on my phone while walking my dog Eloise late last week. Moody's Analytics maintains a leading recession indicator — a rigorous, probit-based (a fancy statistical technique) model built from eight macroeconomic variables, including the yield curve, employment data, and CPI. Its chief economist, Mark Zandi, is not an alarmist and he does not throw numbers around to get on television. The February reading of that model, which was compiled before a single data point from the Iran oil shock was incorporated, came in at 49%. That is, forty-nine percent probability of a recession in the next twelve months.
The historical record of this model is what I need you to sit with for a moment. It has crossed 50% exactly three times in the modern era: 2001, 2007, and 2020. Every single time, a recession followed. It has never produced a false positive at that threshold. Zandi himself said last week that given the oil price surge since the February read, it is "not a stretch" to expect the next update to cross that line. He has also said that if oil stays elevated through Memorial Day, a recession will be "difficult to avoid." That is not TV news hyperbole. That is a man describing what his model says.
The prediction markets are kind of in the same neighborhood. Polymarket–now the largest liquid prediction market in the world–currently prices US recession by year end at 37%. Three weeks ago that number was in the low-30s. It has moved in one direction as the Iran conflict has dragged into its sixth week. These are not polls. These are people putting real money behind a probability. They go where the data goes, and right now the data is going somewhere uncomfortable–directionally, at least.
Here is what all of this comes back to, though, and why I want to be measured rather than alarming: the word "recession" is, at the end of the day, just a word. It is a label applied retroactively by a committee of economists, usually months after the fact, to a period of sustained economic contraction. You will not feel the label. You will feel what drives it, and what drives it, as I said at the top and 1000 times before that, is…wait for it…consumption. Consumer spending is nearly 70% of this economy. If you and I and the 330 million other Americans who instinctively wince at the gas pump keep spending–keep booking the summer trip, keep servicing the car loan, keep going out to dinner on Friday night–then the model is wrong. It has been wrong before, for exactly that reason. The American consumer has a remarkable historical tendency to outrun the forecast.
What I am watching, and what I want you to watch, is whether the nervousness I described earlier–the psychological toll of $5.45 gas, of a portfolio that is down on the year, of a labor market that has shed jobs in six of the last twelve months–starts to translate from feeling into behavior. That is the transmission mechanism. That is how a 49% probability becomes something with an official name.
And here is the one piece of this morning's picture that I will leave you with, because it is genuinely constructive. The bond market moved sharply yesterday in response to Powell's Harvard remarks, with the two-year Treasury yield dropping 10 basis points as rate hike odds collapsed from better than 50% to essentially 0. This morning, literally as I wrote this piece the probability for a 25 basis-point cut went roughly 0 to 20%. What that tells you is that the bond market, which–thankfully–does not do sentiment, which does not do theater, heard the Fed chair subtly acknowledge the employment risk and (perhaps even more importantly) wave off the oil shock as something monetary policy cannot fix. The bond market's read is that the Fed, whatever it is calling the current moment, is watching the labor market with increasing concern and is not going to make it worse by hiking rates into a slowdown. That is not nothing. That is the Fed leaving itself room to act if consumption cracks. Whether it needs to use that room is the question the next several months will answer. It is really subtle, but it is important.
The second you finish reading this, you may feel a little more knowledgeable about what is behind all this noise. I am hoping that knowing all this may make it easier to make investment and consumption decisions. To be clear, do not avoid factoring in risks–and there are plenty of them, but don’t get hung up on labels–words. They are just words.
YESTERDAY’S MARKETS
Monday was a split-tape session with the Dow eking out a modest 11 point gain, while the S&P 500 slipped -0.39%, and the Nasdaq fell -0.73%, as a deepening semiconductor sell-off dragged tech lower even as defensives and energy names found buyers. Brent crude closed at $114 and WTI pushed above $105, its highest level since 2022. The bigger story played out in bonds, where Powell's Harvard remarks triggered a 10 basis-point drop across the Treasury curve, the 2-year falling to 3.83% and the 10-year to 4.33%, as rate hike odds collapsed from better than 50% entering the day to essentially zero by the close.
NEXT UP
MNI Chicago PMI (March) is expected to have declined to 55.0 from 57.7.
Conference Board Consumer Confidence (March) may have slipped to 87.9 from 91.2.
JOLTS Job Openings (February) probably slipped to 6.89 million from 6.946 million.
Fed speakers today: Goolsbee, Schmid, Barr, and Bowman. You know what I will be listening for–you should be too. 😉