U.S. recession is coin flip in next 12 months, New York Fed predicts

There’s a good chance the U.S. will enter into a recession in the next 12 months, confirming Americans’ growing unease about the state of the economy.

According to the New York Fed’s analysis of Treasury spreads, the odds of a recession have grown to 51.8% by May 2025. The estimate is based on the difference between the 10-year Treasury and the 3-month Treasury bill—a leading recession indicator.

A recession is normally defined as back-to-back quarters of negative growth. The U.S. economy met this technical definition in 2022 before the government "redefined" what it means to be in a recession.

Changing the narrative probably won’t convince the public this time.

Unlike in previous years, more than one in two Americans believes the economy is already in a recession, according to a Harris poll conducted for The Guardian.

The survey highlighted the growing disconnect between economic data and how people really feel about the economy and personal finances. But even recent data seems to confirm a weakening economy.

As Creditnews reported, U.S. GDP growth dropped in half in the first quarter as inflation accelerated. There's also an evident slowdown in consumer spending and manufacturing.

The risk is bigger than it appears

According to Bloomberg editor Edward Harrison, recent trends in unemployment suggest that the odds of a recession are much higher than they appear.

Although the unemployment rate remains near historic lows, it's now rising at the fastest pace since 2010. As Harrison noted, “Recessions aren’t about how low the unemployment rate is. It’s about how much things unravel such that people start cutting back on their spending.”

In Harrison’s view, Wall Street is underestimating the risk of a recession in the not-too-distant future.

Earlier this year, Societe Generale also warned that investors, in particular, underestimate the recession threat because they’re blinded by recent gains in the stock market.

These gains are “divorcing investors from cyclical reality,” wrote Societe Generale strategist Albert Edwards.

According to economist and Queens’ College, Cambridge, president Mohamed El-Erian, the other problem is that the Fed isn’t being strategic enough to prevent the economy from heading into a downturn.

In El-Erian’s view, by being overly focused on inflation, the Fed risks keeping interest rates too high for too long, putting more pressure on average Americans and the economy.