Consumers are stressed. That’s not good for the economy.
What Is A Recession?
5/5/2025. Recession is a sustained period when economic output falls and unemployment rises. Very short periods of decline are not considered recessions. As a rule of thumb, a national recession is often considered to be two quarters of decline in real GDP (gross domestic product, inflation adjusted).
However, this can be seen as too narrow a measure. In the US, the NBER (National Bureau of Economic Research) is responsible for ‘calling’ a recession, using a broad set of observations not only of GDP, but other metrics including employment, income, sales, and industrial production.
This complexity means the precise start and end of US recessions are typically not confirmed by NBER until many months after the event – up to 21 months.
Global Recessions
At the global level, organisations like IMF (International Monetary Fund) follow a similar approach, using a broad set of criteria including a decrease in per capita GDP worldwide, requiring synchronised recessions across several national economies. According to the IMF’s definition, this drop in global output must coincide with a weakening of other macroeconomic indicators, such as trade, capital flows, and employment.
Can The IMF Predict Recessions?
According to the IMF, there have been five global recessions since World War II, beginning in 1975, 1982, 1991, 2009, and 2020 (the COVID-19 lockdown).
The chart below shows the IMF’s global GDP projections in the run-up to the 2009 global recession.
By the time the alarm sounded in November 2008, the US had already been in recession for a year, and the S&P 500 had fallen more than 40% from its 2007 peak.
During that period, the IMF’s rule of thumb for potential recession was a global GDP projection below 3.0%. (Currently the threshold figure is set lower, at 2.0%.)
Click to view any chart or table in full size.
Source: Author; IMF, Tradingview, NBER.
Latest IMF Forecasts
In their April 2025 World Economic Outlook, the IMF projects growth in global real GDP of 2.8% for 2025. This is 0.5% lower than the figure just published in January.
To highlight recent changes in momentum, the IMF also publishes quarter-on-quarter projections: the 2025 Q4-to-Q4 figure is 2.3%, which is 0.8% below the figure in the January report.
These rapid downward adjustments point to a dramatic global economic decline during 2025.
UNCTAD Forecasts
UNCTAD (United Nations Conference on Trade and Development) has recently released their own 2025 projections. UNCTAD is more pessimistic that IMF. UNCTAD sees economic output growing at 2.3% for 2025. Notably, this is below their 2.5% threshold indicating global recessionary phase.
Is GDP Useful When It Comes to Forecasting Recession?
The above discussion highlights the complexity of forecasting the global economy, and the unreliability of simplistic GDP projections as a way to time economic cycles.
This message is important for business and investors: don’t over-estimate the significance of macro forecasts or ‘data’, even if it’s from big name financial institutions.
Consumers ARE the Economy
At a granular level, a multitude of factors underpin a healthy economy, or point to one in recession. One of the most important is consumer confidence, which reflects households’ optimism about their financial situation and the broader economy. The impact of consumer confidence on economic activity and growth is huge, at both national and international levels.
High consumer confidence correlates with increased spending on goods and services, directly stimulating economic growth. In contrast, low consumer confidence triggers reduced consumption, precautionary saving, and can lead to economic contraction and recession.
Within nine of the top ten largest economies, consumer spending accounts for more than 50% of GDP.
Referring to the table, below, a simple weighted average calculation shows that almost 40% of global economic output is accounted for by consumer spending of these ten nations. In the US, consumer spending represents over two-thirds of GDP.
Table: Consumer Spending Share of GDP – Top Ten Economies
Consumer spending is fundamentally important to the economy. So, understanding trends and shifts in private consumption patterns is helpful.
Consumer Confidence Index
In the US, the Conference Board conducts a monthly survey and publishes data as the CCI – Consumer Confidence Index. In April 2025, the CCI declined for the fifth successive month in a row, by 7.9 points.
The major part of the decline was driven by the Expectations Index – a sub-component of the CCI – which plunged more than 12 points.
Chart: Present Situation and Expectations Index Components of Conference Board CCI – April 2025
The Conference Board states:
“The three expectation components—business conditions, employment prospects, and future income—all deteriorated sharply, reflecting pervasive pessimism about the future. Notably, the share of consumers expecting fewer jobs in the next six months (32.1%) was nearly as high as in April 2009, in the middle of the Great Recession."
"In addition, expectations about future income prospects turned clearly negative for the first time in five years, suggesting that concerns about the economy have now spread to consumers worrying about their own personal situations.”
The expectations figure, naturally more forward looking than present situation, fell significantly – to 54.4, which is the lowest since October 2011. It’s noteworthy that Conference Board considers an Expectations Index below 80 as signalling a likely recession within 12 months.
More Signs Why Consumers Are Worried About Their Personal Situation
Important measures that give a clue how the US consumer fares financially are housing affordability, and household debt and delinquencies.
Housing (Un)Affordability
Altlanta’s Federal Reserve publishes a monthly Home Ownership Affordability Monitor, providing data on US median home ownerships costs relative to median income. March 2025 figures show that with median home price at $389,672, and median household income at $79,345, it requires the average household to spend 46% of income on housing (principal repayment, interest, tax, insurance, etc.).
The chart below shows the Housing Affordability Gap - defined as the gap between ‘Qualified Income’ which is annual income needed for a household to spend no more than 30% on home ownership, and Actual Median Income.
Post pandemic, the surge in cost of US home ownership relative to income means that housing is unaffordable for millions.
Household Debt
New York’s Federal Reserve publish a quarterly US Household Debt and Credit Report. February 2025’s issue (for Q4 2024 data) shows that not only is US credit card debt at an all-time high ($1.2 trillion), but there is a surge in delinquencies.
Credit card accounts representing more than 11% of total balance are overdue by more than 90 days - reaching the same percentage as early 2009 during the recession.
The chart below shows that the aggregate balance of US non-housing debt increased by 1.5 percentage points from the previous year.
Economic Impact of Declining Consumer Confidence
When consumers are worried about the future, spending patterns change. We spend less on eating out, less on travel and luxuries, we decide to wait until next year to replace the car, postpone buying a new sofa, we switch to supermarket own-label groceries. And so on. As once highlighted by Alan Greenspan, former Federal Reserve Chairman, even men’s underwear sales reduce.
Consumer confidence is known as a leading indicator, preceding reflection in GDP by several months. In their 2017 paper, ‘Is Consumer Confidence Index A Suitable Predictor of Future Economic Growth?’, Jiří Mazurek and Elena Mielcová confirmed the connection:
“Changes in consumer confidence (consumer “mood”) cause changes in consumer spending, which in turn influence GDP with a lag of 3 or 6 months. In four out of 5 examined periods, changes in CCI preceded changes in GDP as expected. The only exception was the period of the so called “dot-com bubble”, when changes in GDP preceded changes in CCI.”
US GDP Declined 0.3% In The Last Quarter
In Q1 2025, US economic output declined by 0.3%. Politicians have their reasons for either a pessimistic or optimistic spin on GDP growth figures, but whatever the reality behind the words, it’s safe to say that this figure doesn’t yet reflect the recent, and meaningful, sharp decline in consumer confidence.
- https://www.conference-board.org/topics/consumer-confidence
- https://www.investopedia.com/terms/c/cci.asp
- https://www.ekonomie-management.cz/archiv/search/detail/1602-is-consumer-confidence-index-a-suitable-predictor-of-future-economic-growth-an-evidence-from-the-usa/
- https://en.wikipedia.org/wiki/Men%27s_underwear_index
A Look At Global Consumer Confidence
The latest Ipsos Global Consumer Confidence survey shows that compared to a year ago, 14 countries show significant reductions in consumer confidence. Only 2 show a notable increase.
We note that the ‘largest losses’ column features five of the ten largest economies.
Aggregating all countries and regions into global averages, the Ipsos chart below shows that all consumer confidence sub-indices have markedly declined over the last few months, following an apparent peak around September 2024.
Summary – A Crisis Of Confidence
1. Despite institutions like the World Bank and IMF publishing regular economic updates and forecasts (IMF: World Economic Outlook, WB: Global Economic Prospects), they have a 100% failure rate when it comes to timely predictions of global recessions - arguably the most valuable piece of economic foresight.
2. Consumer confidence has declined rapidly in recent months in US, and this trend may about to be mirrored at the global level. Consumer spending is a critical component of national economic production. In nine of the ten largest economies, over half of GDP is consumer spending.
3. Consumer confidence is a leading indicator, preceding GDP impact (via consumer spending) by around 3-6 months. Therefore, the US economic contraction in Q1 2025 includes only marginal effects from the recent consumer confidence decline.
4. A continued crisis of confidence could pull the US economy into recession within 6 months, with the global economy to follow. Noting, that such recessions may not be officially labelled as such for up to two years later.
Important Notes
1. Economic forecasting is hard. This is not financial advice.
2. Did you notice I didn’t even mention the ‘T’ word once? ;-)
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