Introducing the RSM US Recession Monitor

U.S. business cycles tend to start with a robust recovery as the economy emerges from a recession. Then, after a period of years, an endogenous or exogenous shock pushes the economy into another recession.

The source of the shock can range from policy errors to oil market disruptions, with the effects first hitting the financial sector and then moving into the real economy.

After significant disruption to trade policy and financial markets this year, we now forecast a 40% probability of a recession over the next 12 months. The increase in this probability can be traced to the launch of the trade war this year and the shocks that have followed.

Even with the recent de-escalation in trade tensions, particularly with China, the risk of a recession remains. The tariffs that remain in place—30% on goods coming from China and 10% on almost all imports from other nations—are high by historical standards and will at the very least cause the economy to slow to a crawl.

To gauge the evolving impact of these events, we introduce our RSM US Recession Monitor. This scorecard is designed to provide an accessible set of metrics to monitor the health of the U.S. economy as it absorbs the impact of a sharp increase in prices linked to the trade war.

Our recession monitor comprises variables selected as indicative readings of the business cycle, captured in five areas of the economy: financial, housing, labor, industry and sentiment. Each monthly variable is assessed by the direction it is moving and by the distance of the current month’s value from its 12-month moving average.

During a recovery, the variables tend to increase faster than their 12-month averages. As the business cycle ends, the variables tend to fall below their 12-month averages, signaling either sluggishness or a sudden drop into recession because of a shock.

The impact of the tariffs was first felt in the financial sector, with the loss of confidence affecting equity markets, bond markets and foreign exchange.

The increased cost of credit will lead to reduced investment that will affect productivity and long-term growth.

The recession monitor shows the current value of each variable, its most recent monthly and yearly changes, and its three-month change on an annualized basis. The last measure signals the trend in the variable rather than reflecting the noise of a monthly change.

In three areas we capture—financial, housing and sentiment—the current risk of a recession is moderate to high. These are the first areas to feel the effect of a shock like the trade war. But in the other two areas—labor and industry—the risk is more tempered, a sign of the economy’s residual strength.

Changes in the variables that are either quantities or prices are reported in percentages. For variables that are sentiment indicators or ratios, the changes are reported in the unit of the variable. 

In the past three recessions, the drop in the financial sector occurred because of the bursting of the 1995−2000 tech bubble; the housing market bubble that preceded the 2008−09 financial crisis; and the 2018−19 trade war that weakened the economy before the pandemic in 2020. 

The deterioration of current financial conditions implies negative growth in the coming quarters.

Financial sector

Any shock to the economy will first be felt in the financial sector, and the recent upheaval in trade policies is proving to be no exception. Our measure of financial conditions, which is designed to anticipate the willingness of firms to borrow and lend, is perhaps the clearest signal of a coming downturn.

Housing

Similar high risks of a recession are showing up in the housing market, which is sensitive to interest rates and to higher input costs in construction on products like lumber, which face higher tariffs under the new trade policy. Consumer confidence also plays a big role in the health of the housing market.

Labor

Not every part of the economy is flashing warning signs of a recession. The labor market, which has been a source of resilience throughout the recovery from the pandemic, continues to be strong. With an unemployment rate at 4.2%, the economy can be best described as being at full employment, which bolsters household balance sheets and supports consumer spending—70% of the American economy.

Industry

In perhaps the most paradoxical measure of recession risk, the industrial sector has, like the labor market, shown residual strength. But part of this strength could be attributed to businesses pulling forward orders for capital goods in advance of higher tariffs, which has bolstered business in the short term. The long-term outlook, however, is another question.

Business sentiment and bankruptcies

While the hard data pointing to a recession seems mixed, there is little ambiguity in what we call the soft data, or business and consumer sentiment. In every category—from purchasing managers’ cautious outlook, to a pervasive sense of unease over economic policy, to waning consumer confidence—businesses and consumers have a sense of foreboding about the economy.

Economists have a term for this: a vibecession, when the soft data is flashing contraction even if the hard data has yet to catch up. These soft measures, though, can change fairly quickly as conditions change. Still, in at least one last piece of hard data—bankruptcies—the risk of a recession is rising.

The takeaway

The shocks that have followed the United States’ upending of long-standing trade policies have brought on uncertainty and the prospect of higher prices to businesses and consumers. These disruptions have led us to estimate the probability of a recession to 40% over the next 12 months.

Our new RSM US Recession Monitor will offer a granular take on the trends taking place across the economy as businesses and consumers try to adapt to a rapidly evolving economic landscape.