In this episode of The REconomy Podcast™ from First American, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi analyze the economic question of the moment – will the downturn in consumer sentiment turn to sediment and usher in a recession?

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Listen to the REconomy Podcast™ Episode 112:

“Actual data is saying no recession, yet. But I think it's true that recession risk has gone up, albeit from some relatively low levels, but it's really too soon to say that the economy is destined for a recession. There's nothing certain about it. The U.S. economy doesn't appear to be near an imminent recession.” – Mark Fleming, chief economist at First American

Transcript:

Odeta Kushi - 
Hello and welcome to episode 112 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing and affordability. I'm Odeta Kushi, deputy chief economist at First American and here with me is Mark Fleming, chief economist at First American. Hey Mark. Now, every once in a while, I like to look up what people are asking about when it comes to the economy, so I check Google Trends to see what people are searching. And can you guess what the topic du jour is?

Mark Fleming - It's interesting. Google Trends is the definitive source of this kind of stuff these days, right? And I can only imagine what's trending on Google right now, but there are a lot of things that come to mind.

Odeta Kushi - Yes. Alright, let me help you narrow it down. The word that I'm thinking of is hard to define and feared by all.

Mark Fleming - Okay, only an economist would get this, but recession, of course!

Odeta Kushi - Of course! Searches for the word recession have increased quite a bit.

Mark Fleming - And it's all over the news headlines, a potential trade war, declining consumer confidence, a recent GDP estimate from the Atlanta Fed that has people truly spooked. And for our listeners, that is a technical econ term.

Odeta Kushi - Yes, spooked. Very technical. When consumers are spooked, they create a self-fulfilling prophecy, turning sentiment into sediment, if you will.

Mark Fleming - Mm-hmm. I really like that sentiment into sediment. That's really a good headline. Maybe we should title the podcast episode that?

Odeta Kushi - Yeah. There you go. Well, before we dive into that headline, let's discuss the Atlanta Fed nowcast called GDP Now. Since you mentioned it, what's that all about?

Mark Fleming - Okay, so first let's describe what the Atlanta Fed's Nowcast is. This is language directly from their website. Quote, GDP Now is not an official forecast of the Atlanta Fed. Rather, it's best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter. There are no subjective adjustments made to GDP Now. The estimate is based solely on the mathematical results of the model. Now that latest update of the Atlanta Fed nowcast for GDP growth recently turned negative for the first quarter of this year. Last month, the forecast was positive 2.3% growth. And, as of this recording, it is turned all the way around and is now negative 2.4%. That's a big change. Obviously, the decline is driven in large part by the decline in net exports. Remember the GDP formula is: GDP equals consumption plus investment plus government spending plus net exports, or in other words exports minus imports. The recent decline in the nowcast was in part attributed to a likely drop in exports due to reciprocal tariffs reducing demand in other countries for our exports.

Odeta Kushi - Oof. You're really taking me back to Intro to Micro. C plus I plus G, right? 

Mark Fleming - It sure is. 

Odeta Kushi - So, a drop in exports signals weaker demand for domestic goods, which can lead to production slowdowns and potentially even job losses.

Mark Fleming - Exactly. That's macro 101, guys. Right, but I think more important is that the decline in the nowcast is also being driven by a decline in consumer spending, which in the Atlanta Fed's estimation has been revised from down from 1.53% of GDP late last month to just barely above zero at 0.3 % this month. But there's still more data to come, and it's likely that we'll get more revisions to this early estimate, so we might get a more positive story as we get further into the quarter.

Odeta Kushi - That's a good point, but the negative figures didn't come out of nowhere. I know, I know. But we've seen several concerning reports in recent weeks. Consumer sentiment in January fell the most in three and a half years. Retail sales dropped by the most in nearly two years.

Mark Fleming - You know, ever the economic Grinch, Odeta.

Odeta Kushi - Real spending fell at the fastest rate since early 2021, and Walmart has warned of a pretty tough year ahead. Not to mention, a lot of the uncertainty can trigger what we call a wealth effect reaction that could have implications on the real economy. I mean, if consumers see their stocks going down, they might ultimately tighten their belts.

Mark Fleming - Yeah, and that's truly part of the self-fulfilling prophecy that you mentioned earlier. And, in the U.S., the consumer is king. Consumer sentiment turning to sediment can be big problem.

Odeta Kushi - Indeed. Consumer spending drives 70% of U.S. GDP growth. In fact, when I think about the health of the economy, I immediately look at data relating to the health of the consumer. So, think about it in three things. Consumer spending, consumer sentiment, and the health of the labor market. Are consumers gainfully employed?

Mark Fleming - Yeah, but so far, the labor markets continue to grow and consumer spending has been pretty resilient to data.

Odeta Kushi - That's true, but consumer sentiment, as I mentioned, that's declined. And there are signs of weakness to come in the labor market. For example, the hiring rate has been very low. It's at about the same level as it was in 2013, 2014, when the unemployment rate was 7%. So, for those out there looking to find work, it's really hard to find a job. And, if that hiring rate doesn't pick up, we might see an increase in the unemployment rate.

Mark Fleming - Just going to have to start calling you Debbie Downturn. Get it? Get it? 

Odeta Kushi - Yeah. That's okay. That's actually a really, really good one. Well done. I'm not even offended. That's too good. Well, I've got some positive things to say about the economy too, okay. Real wages are positive, which has helped consumers finance spending. And, as you mentioned earlier, the labor market does continue to grow, while the unemployment rate remains low. Actually, the unemployment rate is right now below the Fed's target unemployment rate. So, on that front, we're doing well.

Mark Fleming - Yay! Yeah, audience, wait for it. Wait for it. Where is the but, Odeta? There's a but here. No?

Odeta Kushi - No faith in me. Okay, but I do have a but. So, the unemployment rate is actually a lagging indicator of recession. So, by the time that we see an unemployment rate increase, we may actually already be in a recession and consumers are facing headwinds. For example, credit card debt, both in nominal and inflation-adjusted terms, is on the rise. Since the end of 2022, the delinquency rate on that credit card debt has risen from about 7.5% to almost 11%. So, some of the spending is being financed with credit card debt that consumers are struggling to repay.

Mark Fleming - And there it is audience: Debbie Downturn has returned again. 

Odeta Kushi - I can't help it. I can't, I can't help it. You know, I have supporting data here. But really, one of the questions we should be asking is, what does it take to make an official recession call? All of this data that we've cited, is it enough to call a recession? I mean, how do you even define a recession?

Mark Fleming - That's true. That's a great point, and as with many things economic, it's of course, not so simple. We have a whole podcast episode dedicated to this, so please let listeners refer back to episode 44 for a deeper dive into what defines a recession. Episode 44 so long ago, and I think something to do with ACDC in there as well, I believe.

Odeta Kushi - So long ago.

Mark Fleming - The episode summary is a committee known as the NBERBCDC. Get it? BCDC, ACDC? The National Bureau of Economic Research Business Cycle Dating Committee determines recession start and end dates.

Odeta Kushi - Yes, the BCDC determining whether an economy is highway to hell or more like stairway to fiscal heaven.

Mark Fleming - Gosh, that's pretty good. You're on a roll today. ACDC, BCDC, so easy, clearly to get them confused with each other. But speaking of the BCDC, they look at a wide range of different indicators to determine whether an economy is or was in recession. They look at measures ranging from real personal income, less transfers – those transfers being things like social security payments and welfare payments – non-farm payroll employment, employment as measured by the household survey, real personal consumption expenditures – so you can see the consumption and the labor market in there – wholesale retail sales adjusted for price changes, and industrial production. Their definition emphasizes that a recession, “involves a significant decline in economic activity spread across the economy and lasts more than just a few months." And they highlight that they look at three criteria, depth, diffusion, and duration.

Odeta Kushi - Yeah, well, that makes a lot of sense because the pandemic recession, for example, was very short. So, perhaps it wouldn't qualify as a recession from a duration standpoint, but it was very deep and widely diffused. That certainly qualifies it as a recession. But I think the takeaway here is that defining a recession is not as simple as consecutive declines in the GDP, as is so often cited, though certainly that's one important measure to look at. But, since you just listed six specific measures, how are we doing across those measures?

Mark Fleming - Well, the monthly change in total non-farm employment remains positive. In fact, in February, we gained 151,000 jobs.

Odeta Kushi - Yes, but that's the payroll survey. Now what about the employment level as measured by the household survey? Remember, the payroll survey estimates the nation's employment based on responses from a sample of business establishments, while the household survey estimates the nation's employment based on responses from interviews with households. So, the household survey asks people whether they're working or looking for work, while the payroll survey asks employers how many jobs they have.

Mark Fleming - That's a great point, Odeta. And, indeed, in February, the employment level decreased, according to the household survey. The number of people employed in February fell by 588,000, while U.S. employers were adding 151,000 jobs to their payrolls. But the payroll survey is a lot bigger and more stable. In fact, the household survey, a change in employment has to be more than 600,000 to even be considered statistically significant.

Odeta Kushi - So, naturally, they make it easy for us. So, in this instance, we're trusting the more positive number. So that's good. That's a good news story. Moving along to the Industrial Production Index, which in January was up from a year ago. Similarly with the real manufacturing and trade industry sales numbers, real personal income, excluding transfer receipts, and real personal consumption expenditures.

Mark Fleming - Go with that. Yes. Yes, and real GDP.

Odeta Kushi - That's right. So, most of the BCDC's preferred metrics are pointing positive. So, no recession right now, according to these measures. Does that seem to align with economic consensus?

Mark Fleming - Okay, I'm so glad you asked Odeta because clearly we're going to ask lots of economists what they think of the matter and the Wall Street Journal... Exactly. Well, we'll see about that. The Wall Street Journal has an economic forecasting survey that's been around for more than 40 years and the economists in the survey are a panel that include more than 70 academic, business and financial economists. One of the questions that they are asked about in the survey is, what is the recession risk over the next 12 months?

Odeta Kushi - Wise.

Mark Fleming - The exact question posed to the panel is, what is the probability in percentage terms that at any time in the coming 12 months, including today, that the U.S. will be in recession?

Odeta Kushi - And the average probability was...

Mark Fleming - Wait, first some historical context. Prior to the pandemic recession in February of 2020, the probability was 26%. If you recall, we were all worried about a recession at the end of 2019, although we didn't realize what was coming in early 2020. So naive. 

Odeta Kushi - Yeah, so naive.

Mark Fleming - That's right. Exactly. That's called an exogenous shock, I think, by Iconos. Yep. It skyrocketed to 96 % in April of 2020. Now I would argue that that is more of a nowcast than a forecast at that point, since that was the very beginning of the pandemic.

Odeta Kushi - I mean, my question is, who are the 4% who are like, no, everything's fine? 

Mark Fleming - Exactly. No, we're good. We're good. Non-respondents, I suspect. It came back down to 24% by the end of 2020 and then peaked once again at 63 % at the end of 2022. And, remember, at that point, the Fed was really pushing hard on raising rates. And, of course, everyone knows that when the Fed raises rates, there's almost always a recession to come. Right. Although that actually hasn't happened. Now fast forward to January of 2024 and it was 39%. So elevated, yes, but certainly not more than half. So, clearly economists have been so good at forecasting recession risk. You should sense some irony.

Odeta Kushi - I sense some irony in that statement, but who said forecasting was easy, especially recession forecasting? I mean, we can't even define recession, let alone predict it.

Mark Fleming - Yes, indeed, and it's kind of like the inaccurate weather forecaster, we keep tuning in. So, the forecast now in the latest report from January is back down to 20-22%. But, of course, that was before a lot of the trade war uncertainty.

Odeta Kushi - Mm-hmm. Yeah, so this survey was completed in January of this year, so it's lagging in that sense. It hasn't incorporated a lot of the new policy information, but there's another indicator we could look at. This is a new recession indicator called, aptly, the SOS indicator. The SOS recession indicator signals a recession when the 26-week moving average of the insured unemployment rate rises by more than 0.2 percentage points relative to its minimum over the preceding 52 weeks. So, this offers a really simple, timely, and accurate way to track labor market deteriorations. And because it's based on administrative data, it can be more resilient to data challenges observed in other survey-based indicators, right? There's rising non-response rates in a lot of surveys, and this does not struggle from that. So that's right. I think it's forecasted correctly most recessions since something like 1970s.

Mark Fleming - And it's proven to be quite accurate at looking back at past recessions. It looks pretty accurate. Forget the economists. Just watch the SOS indicator.

Odeta Kushi - Yeah, yeah, watch the data, watch the data. So again, we're recording this on March 13th and the indicator isn't signaling recession risk yet. And yet another recession indicator, so this one predates the SOS indicator and I would say that the SOS indicator looks very similar to this one, it's just based on higher frequency data. The SOM rule, which is triggered when the unemployment rate increases by 0.5% or more over three months, that's also not flashing red yet.

Mark Fleming - Yeah, the Debbie Downturn comes out again, right? So, to summarize, economic forecasts are notoriously inaccurate. Actual data is saying no recession, yet. But I think it's true that recession risk has gone up, albeit from some relatively low levels, but it's really too soon to say that the economy is destined for a recession. There's nothing certain about it. The U.S. economy doesn't appear to be near an imminent recession.

Odeta Kushi - Yes, that's right.

Mark Fleming - It was growing at a steady clip at the end of last year. The first quarter isn't over yet. And the jobs market was still in growth mode in January and February.

Odeta Kushi - Yes, Debbie Downturn will agree on those points, but since we are housing economists, let's just say, let's just pretend that we are officially in a recession. Any thoughts on how the housing market would react?

Mark Fleming - Well, Debbie, according to our research, with the exception of the Great Recession, house price appreciation hardly skips a beat in recession. And existing-home sales? Well, we actually recently published a blog post on this and we found...

Odeta Kushi - We did publish a blog post on this and we found that looking at the last four recessions, we see varied impacts on existing-home sales. Some downturns had little-to-no negative effect, while others, especially when tied to housing – I'm looking at you, Global Financial Crisis – caused steeper declines. A recession alone doesn't necessarily lead to a housing downturn. The housing market's performance depends on the causes of the recession and, of course, how the Fed responds to that recession. Because when the economy slows, the Fed typically lowers interest rates to stimulate growth. As a result, we often see mortgage rates declining, which could improve affordability and boost house-buying power. This dynamic was clear in past recessions, where rate cuts actually encouraged home sales because of that boost in house-buying power. So, even in economic uncertainty, lowering borrowing costs can make homeownership more attractive, offsetting some of the recession's negative effects, like a potential decline in household income. 

Mark Fleming - Okay, it's almost like we're countercyclical.

Odeta Kushi - That's right, that's a good point. Okay, I think that's enough on recessions for now. Debbie Downturn signing off.

Mark Fleming - Debbie, I think this name is actually gonna stick. We're gonna have to figure this one out.

Odeta Kushi - I really, I really, really hope not. Well, thank you all for joining us on this episode of The REconomy Podcast. If you have an economics-related question you'd like us to feature in the future, you can email us at economics@firstam.com. And, as always, if you can't wait for the next episode, you can follow us on X. It's @OdetaKushi for me and @MFlemingEcon for Mark. Until next time.

Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast™ from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2025 by First American Financial Corporation. All rights reserved.