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U.S. GDP Contracts as Recession Odds Tick Up with Fed on Hold

Tuesday, May 6, 2025 6:09
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An editorial cartoon of a Federal Reserve official looking at a crystal ball that says 'RECESSION'. Image generated by Microsoft Copilot Designer

Real economic growth in the United States contracted 0.3% in the first quarter of 2025.

Although that’s an initial estimate, that’s a remarkable development because it comes in the middle of a period in which the recession forecasting model we’ve tracked every six weeks since October 2022 signaled the probability of such an event would be exceptionally high.

But more to the point, those signals were sent more than a year ago.

The following chart shows how the probability of a recession based on a yield curve-based recession forecasting model developed by Jonathan Wright for the Federal Reserve Board in 2006 has evolved over the past 43 years.

Recession Probability, 30 April 1983 through 5 May 2026

The period from July 2024 through mid-September 2025 represents the most likely period in which the National Bureau of Economic Research will someday get around to saying the U.S. economy peaked before beginning a period of contraction. Should the NBER identify a month within this period as the starting month for a new recession, or business cycle contraction in the NBER’s terminology, Wright’s recession forecasting model suggests it is because it was “baked in” well before 2025 began.

Jumping forward to the present, Wright’s recession forecasting model has risen over the past six weeks after stalling as expected because the Federal Reserve chose to pause its latest series of interest rate cuts after its 19 December 2024 quarter point rate cut of the Federal Funds Rate. The probability has increased to nearly 26%, where it had previously bottomed at 20%. Here’s the latest update to the Recession Probability Track:

Recession Probability, 20 January 2021 through 5 May 2025

This newest estimate applies to the probability the NBER will someday pick a month between 5 May 2025 and 5 May 2026 as the starting point for a period of economic contraction for the U.S. economy.

Looking forward, we anticipate the forecast recession probability will remain around this level in the near term because Federal Reserve officials appear set to continue their pause in rate cuts. At present, the CME Group’s FedWatch Tool projects the Fed will decline resuming its rates cuts until the conclusion of its 30 July (2025-Q3) meeting. However, the FedWatch Tool anticipates the Fed will reduce U.S. interest rates three times before the end of 2025, anticipating 0.25% cuts in the Federal Funds Rate on 30 July (2025-Q3), 17 September (2025-Q3), and 29 October (2025-Q4).

Absent a deep inversion of the U.S. Treasury yield curve, we think the forecast recession probability will likely remain near its current level until the Fed resumes cutting short-term U.S. interest rates.

We will continue following the Federal Reserve’s Open Market Committee’s meeting schedule in providing updates for the Recession Probability Track until the U.S. Treasury yield curve is no longer inverted and the future recession odds retreat below a 20% threshold.

Analyst’s Notes

The recession probability we’ve presented is based on the Federal Reserve Board’s yield curve-based recession forecasting model, which factors in the one-quarter average spread between the 10-year and 3-month constant maturity U.S. Treasuries and the corresponding one-quarter average level of the Federal Funds Rate. If you’d like to do that math using the latest data available to anticipate where the Recession Probability Track is heading, we have provided a tool to make it easy to do.

For the latest updates of the U.S. Recession Probability Track, follow this link!

Previously on Political Calculations

We started this new recession watch series on 18 October 2022, coinciding with the inversion of the 10-Year and 3-Month constant maturity U.S. Treasuries. Here are all the posts-to-date on that topic in reverse chronological order, including this one….

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