The US Economy May Be Slowing, But Recession Risk Remains Low
By James Picerno | The Milwaukee Company
TMC Research’s nowcast of recession risk continues to indicate a low probability that a downturn has started or is imminent
The economy has probably slowed in Q4, but the downshift doesn’t look sharp enough to trigger a recession warning, at least not yet
The delayed Q3 GDP report is expected to confirm that economic activity was robust going into the final months of the year
Recent concerns about elevated recession risk still look overstated, based on the TMC Recession Probability Indicator, which aggregates and models data from three business-cycle indicators published by regional Fed banks (see here for details).
There are signs that the economy is slowing, which could lead to a contraction at some point, but data published to date is nowcasting a low probability that a downturn has started or is imminent.
The government shutdown created a data void recently by delaying economic reports. Since Washington reopened nearly a month ago the numbers have started flowing again and the current profile as of early December suggests the odds for a new NBER-defined downturn remain low.
Zooming in on recent activity highlights a modest pickup in recession odds, but from a low base. Recent estimates have been relatively steady around the 5% mark, which suggests that the downshift in economic activity may be stabilizing.
Incoming data could change the calculus, and so paying close attention to updates over the next several weeks will be crucial as more of the missing economic numbers are published.
Meantime, the still-delayed third-quarter GDP report is expected to post a robust gain, extending the strong increase reported for Q2. The current Q3 nowcast via the Atlanta Fed’s GDPNow model is estimating that output rose 3.5% in the July-through-September period (as of Dec. 5), which is close to the robust 3.8% increase reported for Q2.
The crucial question is how Q4 is shaping up? Several private sources indicate the labor market contracted in November. ADP, for example, reports the economy shed 33,000 jobs in the private sector last month.
The headwinds may be strengthening for 2026. If and when the downshift resonates in actual data, the deterioration will show up in our recession-probability tracker. For now, at least, the risk of recession remains mostly steady at a modest level in line with recent history.
