How healthy is the US economy? Here’s what the top economic indicators say

Fears of a recession are back on investors’ minds. But predicting the onset of an economic downturn, let alone the length and severity of one, is difficult even for the experts.

As a rule of thumb, two quarters of gross domestic product contraction is generally accepted as a recession, but the official start date is declared by the Business Cycle Dating Committee of the National Bureau of Economic Research.

While we often don’t know we’re in a recession until it‘s well underway, here are some economic signals worth watching to get a sense of the economy’s health.

What are the key economic indicators?

These indicators can help give us a better understanding of where the economy and the markets stand, but they can’t perfectly predict the future. Further, many of these measures are affected by a variety of factors that may or may not point to a recession, so interpreting the data isn’t always cut and dry.

Here are some of the key indicators that economists track to understand economic health and where we might be headed.

Real GDP. A prolonged slowdown or outright decline in GDP growth may be a cause for concern. The general rule of thumb is that two quarters of contraction can be considered a recession.
Consumer spending. Consumer spending is the largest component of GDP. Consumers tend to tighten their belts in response to economic uncertainty, which can lead to lower economic output.
Employment. Recessions tend to stifle wage increases and promotions, and they may trigger layoffs. Higher initial jobless claims and lower or declining job growth may be signs of a recession.
Inflation. Inflation tends to rise during periods of economic expansion. The opposite is usually true during contractionary periods, but persistent high inflation without corresponding economic growth may cause consumers to cut back on spending.
Interest rates. High inflation may cause the Federal Reserve to raise interest rates to contain it. In contrast, the central bank may lower rates to encourage borrowing and bolster job growth at the risk of raising inflation.
Yield curve. Aninverted yield curveoccurs when short-term bond yields are higher than those of longer-term bonds. This indicates future expectations of lower interest rates, and thus lower growth and inflation. Inverted yield curves have historically occurred ahead of recessions.
Stock market performance. While the stock market and the economy don’t always move in tandem, economic uncertainty can prompt market selloffs.

We’ll take a closer look at where these indicators stand. Keep in mind that it can take time for the data to catch up to what‘s going on because most of our traditional economic data is released at least a month behind when it happened.

GDP has contracted, but not yet cause for alarm

Data as of March 31, 2025.

Gross domestic product is a key measure of economic health. GDP is the monetary value of all finished goods and services made within a country during a certain period, and it‘s used to estimate the size of the economy. GDP growth year over year indicates a healthy economy, while slowing growth or an outright decline can be cause for concern.

Preliminary GDP data released on April 30 by the US Bureau of Economic Analysis showed that economic growth contracted at a rate of 0.3% in the first quarter of 2025. As Morningstar senior reporter Sarah Hansen notes, that contraction was largely driven by a spike in imports, as US companies stocked up ahead of widespread tariffs. So, the contraction likely isn’t an immediate signal of recession.

Still, there are some concerning signs within the overall GDP growth data: Personal consumption grew at its slowest rate in nearly two years, which may be a sign of shaky consumer confidence.

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Consumer Spending Is at Odds With Consumer Sentiment

Data as of March 31, 2025.

Consumer spending comprises just under 70% of US GDP. As the largest component of the economy, it is one of the biggest determinants of the country’s economic health.

In the first quarter of 2025, real personal consumption expenditure increased by 1.8% from the previous quarter. First-quarter spending is often the lowest of the four quarters, as consumers cut back after the holidays and leading up to summer travel.

While the latest spending data doesn’t sound any alarms, consumer sentiment has dropped sharply. As Hansen points out, consumers are pessimistic, but that pessimism hasn’t translated into a pullback in spending. The question that economists have today is whether the spending data will catch up with the negative consumer sentiment.

Labor Market Holds Steady, but Policy May Have Future Impacts

Data as of March 31, 2025.

There are multiple ways to look at the health of the US labor market, which is tied to the overall health of the economy. Job growth is a primary indicator. The monthly nonfarm payrolls report from the Bureau of Labor Statistics shows the change in the number of workers in the US, with some exceptions like farming, active military, and self-employment.

The April nonfarm payrolls report indicates that the US labor market continued to add jobs at a stable pace, though slower than March. But as Morningstar’s Bella Albrecht points out, federal workforce cuts, rapidly changing trade policy, and immigration policy shifts could cause the labor market to slow in the coming months.

Inflation Remains Just Above Fed’s Target 2%

Data as of April 30, 2025.

The Consumer Price Index increased 2.3% in April compared with year-ago levels. On a monthly basis, the CPI increased 0.2%. The Core CPI, which excludes volatile food and energy costs, was up 2.8% from 2024. It will likely take some time to see the full price impacts that tariffs will have on consumers. If inflation rises, the Federal Reserve may be inclined to raise rates to combat it. However, that may not be feasible in the face of a slowing economy.

Analysts Expect Fed Rate Cuts to Wait Until July

Data as of April 30, 2025.

The Federal Reserve’s dual mandate requires it to promote maximum employment while holding prices steady. The central bank typically aims to hold long-run inflation at an annual rate of 2%, as measured by the Personal Consumption Expenditures Price Index. The Fed’s two goals of high employment and low inflation are often at odds with each other, so managing them is a balancing act.

As Morningstar Senior US Economist Preston Caldwell explains, the Federal Reserve is still waiting to see how the tariff shock plays out before changing interest rates. At the most recent meeting, Fed Chair Jerome Powell continually reiterated the need to “wait for greater clarity.” Caldwell expects that the Fed will wait until it has two or three months of data on the impact of the tariffs before it cuts rates.

Inverted Yield Curve Reflects Higher Short-Term Yields

Data as of May 15, 2025.

The yield curve measures the yield to maturity of bonds across various maturities. The curve normally slopes up and to the right as investors need a higher yield to take on additional risks that occur over longer time horizons. An inverted yield curve often indicates an expectation of lower interest rates, and thus lower growth and inflation, in the future.

The spread, or difference in yield, between 10-year and three-month Treasury yields is a common metric used to quantify the shape of the yield curve. A negative spread indicates an inverted yield curve because the 10-year issue has a lower yield than the three-month. Negative spreads have historically preceded recessions.

Yields at the short end are closely tied to the Fed’s short-term policy rate. When the Fed increased its short-term policy rate to fight inflation in 2022, the yields on short-term Treasury bills followed suit. Treasury yields across most of the curve rose in response to Fed rate cuts in 2024, but uncertainty has caused longer-term yields to waver in 2025.

Stock Market Volatility Has Calmed, but Analysts Expect More to Come

Data as of April 30, 2025.

It‘s easy to think that the stock market and the economy would always go hand in hand, but here are some reasons they don’t:

The stock market doesn’t represent everyone participating in the economy, and a significant amount is owned by the wealthiest individuals.
It’s disproportionately made up of large corporations, while small businesses are a major driver of the US economy.
Stock prices reflect investor confidence in the future. Things like spending and employment are indicators of the current economic climate.

The stock market might reflect changes in the economy and vice versa, but the state of one doesn’t necessarily paint the full picture of the other. Still, it’s worth keeping an eye on the markets as recession concerns crop up.

After US President Donald Trump announced tariffs in early April, stocks quickly plunged over the next week, as the Morningstar US Market Index fell 20% from its highest level. Shortly thereafter, the markets bounced back in response to a 90-day pause on the tariffs. Stocks ultimately recaptured the losses from the initial fallout to finish around the same level as the end of March. Morningstar Chief US Market Strategist Dave Sekera anticipates more volatility to come as tariff negotiations pan out.

How Should We Interpret Economic Indicators?

No single indicator tells the whole story of economic health, so we shouldn’t look at any one data point in isolation. Even interpreting GDP growth, which is the primary indicator of economic health, can be difficult in the short term because of noise in the data. Plus, there are nuances that may affect how we interpret what we’re seeing, and even comprehensive historical data can’t perfectly predict the future.