Crystal ball reflecting storm clouds over a city skyline, representing an economic recession.

Can We See the Next Recession Coming? Real-Time Predictions & Economic Indicators

Rhea Morgan in Business & Economy June 2025 • 5 min read.

"Explore how economists use data and models to forecast recessions in real-time, and what it means for you."

The economy is a bit like the weather: everyone talks about it, but predicting what it will do next is incredibly complex. One of the biggest concerns for individuals and businesses alike is the possibility of a recession. Recessions bring job losses, reduced incomes, and increased financial stress. This is why economists are constantly working to develop tools and models that can help us see the next economic downturn coming.

In a recent research paper, economist Seulki Chung explored how well different forecasting models could have predicted the Great Recession and the COVID-19 recession in real-time. The paper looked at a range of economic indicators and used both standard and more advanced statistical models to see which ones were the most accurate in signaling trouble ahead. The goal? To provide insights into how we can better anticipate and prepare for future economic challenges.

This article breaks down the key findings of Chung's research, explaining the models, the data, and the economic indicators that play a crucial role in recession forecasting. We'll explore what makes predicting recessions so difficult, especially when unexpected events like a pandemic throw everything off course. Whether you're an investor, a business owner, or simply someone interested in understanding the forces that shape our economy, this article will provide a clearer picture of how economists try to see the future—and what their predictions mean for you.

Decoding Recession Predictions: What Indicators Really Matter?

Crystal ball reflecting storm clouds over a city skyline, representing an economic recession.

Predicting a recession isn't like predicting a specific event. Recessions are complex and influenced by many interconnected factors. While economists can't point to one single cause, they look at a range of economic indicators to assess the overall health of the economy and the likelihood of a downturn. Here are some of the key indicators that Chung's study and other research have found to be particularly useful:

The term spread is one of the most reliable recession indicators. It reflects the difference between long-term and short-term interest rates. Typically, the yield curve is upward sloping. But when short-term rates are higher than long-term rates (an inverted yield curve), it suggests that investors are pessimistic about the future and expect the economy to slow down. This "term spread" has historically been a pretty accurate predictor of recessions.

Real GDP (Gross Domestic Product): This measures the total value of goods and services produced in a country. A sustained decline in GDP is a primary signal of a recession.
Non-farm Payroll: Indicates the number of paid U.S. workers in any business, excluding: general government employees, farm employees, private household employees and employees of nonprofit organizations. Declines often point to economic contraction.
Consumer Confidence: Reflects how optimistic or pessimistic consumers are about the economy. Lower confidence can lead to reduced spending, contributing to a slowdown.
The S&P 500 Index: A stock market index that tracks the performance of 500 of the largest publicly traded companies in the United States. Stock market declines can reflect and amplify economic concerns.

These indicators aren't perfect on their own, but when viewed together, they can provide a more comprehensive picture of the economy's health. Economists use these indicators to feed into various forecasting models, helping them estimate the probability of a recession.

Turning Forecasts into Foresight: What Does It All Mean?

Predicting recessions is a challenging but vital task. While no model is perfect, understanding the key economic indicators and the different approaches to forecasting can help us better prepare for future economic challenges. By staying informed and considering the insights from economic research, individuals, businesses, and policymakers can make more informed decisions to navigate the ups and downs of the economic cycle. Recognizing the limits of predictability is also key. Unexpected events, like the COVID-19 pandemic, can disrupt even the most sophisticated models, reminding us that adaptability and resilience are crucial in an uncertain world.

About this Article -

This article was crafted using a human-AI hybrid and collaborative approach. AI assisted our team with initial drafting, research insights, identifying key questions, and image generation. Our human editors guided topic selection, defined the angle, structured the content, ensured factual accuracy and relevance, refined the tone, and conducted thorough editing to deliver helpful, high-quality information.See our About page for more information.

This article is based on research published under:

DOI-LINK: https://doi.org/10.48550/arXiv.2310.08536,

Title: Real-Time Prediction Of The Great Recession And The Covid-19 Recession

Subject: econ.em

Authors: Seulki Chung

Published: 12-10-2023

Everything You Need To Know

What is the significance of the 'term spread' in predicting economic recessions?

The 'term spread,' which is the difference between long-term and short-term interest rates, is a crucial indicator. An inverted yield curve, where short-term rates exceed long-term rates, suggests investors expect an economic slowdown. Historically, the 'term spread' has been a reliable predictor of recessions because it reflects investor sentiment and expectations about future economic conditions. A flattening or inversion often precedes economic downturns, making it a key factor in recession forecasting models.

Besides 'Real GDP', what other key indicators do economists use to forecast recessions, and why are they important?

In addition to 'Real GDP' (Gross Domestic Product), economists closely monitor 'Non-farm Payroll,' 'Consumer Confidence,' and the 'S&P 500 Index.' 'Non-farm Payroll' indicates the number of paid U.S. workers, excluding specific categories, and declines often signal economic contraction. 'Consumer Confidence' reflects consumer optimism or pessimism, which influences spending patterns. The 'S&P 500 Index' tracks the performance of major publicly traded companies, and stock market declines can reflect and amplify economic concerns. These indicators, when analyzed together, provide a comprehensive view of economic health and potential downturns.

How did economist Seulki Chung's research contribute to understanding recession predictions?

Economist Seulki Chung's research explored how well different forecasting models could have predicted the Great Recession and the COVID-19 recession in real-time. The research analyzed a range of economic indicators using both standard and advanced statistical models to identify which were most accurate in signaling trouble. Chung's work offers insights into better anticipating and preparing for future economic challenges by evaluating the effectiveness of various models and indicators.

Why is it so challenging to accurately predict recessions, and what role do unexpected events play?

Predicting recessions is challenging because they are influenced by many interconnected factors, not a single cause. Economic models, while helpful, have limitations, and unexpected events like the COVID-19 pandemic can disrupt even the most sophisticated forecasts. These events highlight the need for adaptability and resilience in economic forecasting and policymaking. The inherent complexity and unpredictability of global events make accurate, long-term recession predictions difficult.

What practical steps can individuals, businesses, and policymakers take, given the uncertainties in recession forecasting?

Given the uncertainties, individuals, businesses, and policymakers should stay informed about key economic indicators and insights from economic research, like those provided by Seulki Chung. They should make informed decisions to navigate economic cycles, while also recognizing the limits of predictability. Adaptability and resilience are crucial, allowing for quick adjustments in response to unexpected events. Diversifying investments, managing debt, and implementing flexible business strategies are essential for mitigating risks during economic downturns.