Wait, Weren’t We Supposed to Have a Recession in 2025?

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1:02Bloomberg Audio Studios. Podcasts. Radio. News. It's that time of December. We're taking stock of the year that was and looking forward to the upcoming year. Problem is, trying to describe the state of the U.S. economy in 2025 isn't exactly a straightforward task. Still, we try. We're journalists. We're storytellers. We're always looking for a story in the data. Stacey Vanek-Smith is a financial journalist and the host of Bloomberg Businessweek's Everybody's Business podcast. She says when she tried to reflect on the year that was, the data just didn't translate into neat narratives. I just couldn't find one that held together.

1:47From jobs numbers and consumer sentiment polls to stock valuations and inflation indicators. Everything has been topsy-turvy. Right now in the economy, there are parts that are so strong and so good. I mean, obviously, the market's setting records all the time. There's all this really exciting growth and expansion with AI. At the same time, the job market is so stagnant. It feels like it's in a deep freeze. It's just a hard economy to get your head around. Every time I sort of identify a narrative thread, it goes away. What I ended up landing on was Alice in Wonderland.

2:31Because that is a place where nothing makes sense. When Alice goes into Wonderland, she follows the rabbit and like is in this strange world. Her perspective is always getting thrown off. She's big. She's little. Much of the gains wiped out as investors sold off after the rally. People speak in gibberish. North Korea's used cryptocurrency to evade sanctions. She thinks she's getting a handle on what's going on. She doesn't have a handle on what's going on. There is growing uncertainty over the economy again as President Trump renews a possible hike in Chinese goods.

3:08And that's how I feel when I look at the economy. Like, none of these numbers are lining up. We are in a through-the-looking-glass economy to me.

3:24I'm Sarah Holder, and this is The Big Take from Bloomberg News. Today on the show, Bloomberg's Stacey Vanek-Smith and Moody's analytics Mark Zandi help us understand what this year's wonky economy can tell us as we head for 2026. Could things stabilize? Or are we still seeing recession risks down the rabbit hole?

3:50For several years in a row, economists, market watchers, and everyday people have looked at the U.S. economy and saw warning signs of a recession. Remember when the yield curve inverted in 2022? And when the unemployment rate triggered something called the SOM rule in 2024? These have historically been reliable recession predictors. A few years ago, all of these economic indicators were saying 100 percent chance of a recession, 90 percent chance of a recession. All of these really respected, venerated institutions that study the economy very seriously were all saying a recession's coming. And then here we are.

4:28It just never came. And there were also recession fears this year, right? What what do you think was kind of the peak of our recession fears in 2025? Oh, Liberation Day in April. Liberation Day, when President Trump unveiled the chart, do you remember the chart on the White House lawn with all of those double digit tariffs on dozens of countries all over the world? It was shocking. I mean, here at Bloomberg, I think our economists' recession predictions went up from 20 percent to 40 percent, I believe. And everybody just thought this is going to throw such a huge wrench into our economy, into economies around the world.

5:04This is going to do it. A recession is going to come. It didn't come. Here we are. End of 2025, no recession. In fact, the economy has been growing at a pretty strong pace, like over 3%. That doesn't mean there aren't still fears of an economic contraction as we head into 2026. Analysts surveyed by Bloomberg put the odds of recession next year around 30%. Mark Zandi, the chief economist at Moody's Analytics, said his team has it even higher. Well, to be precise, 42 % probability of recession over the next 12 months. That's based on a model that we've created that looks a lot of different data.

5:44I mean, and that's very consistent with my intuition. So if you said, hey, Mark, what do you think the probability of recession is over the next year? I'd say 40 to 45%. So at this point in time, both the model and Zandi say roughly the same thing. It's not quite a coin flip, but it's close. And Mark thinks these odds are uncomfortably high. In a healthy economy, he says that number should be closer to 15 percent. We're growing, but it's a very fragile growth. You know, everything's got to kind of stick to script here. The way I think about what's going on in the economy and where it's going to be over the next year is it's being buffeted by these very two powerful crosswinds.

6:23One is deglobalization, tariffs, immigration policy are part of that. There's other aspects of that as well. and the tailwind is AI. And these two forces are really buffeting each other to a draw. But if anything changes to alter that balance between those headwinds and tailwinds, then we've got a problem. And those headwinds are strong. Mark says tariffs and immigration crackdowns are already impacting sectors like manufacturing. That's a very trade-sensitive part of the economy. That's in recession. We're losing jobs and industrial production is going nowhere fast. and purchasing manager surveys are indicating contraction.

7:03Transportation distribution, also trade sensitive. That's contracting, that's in recession. Transportation distribution, meaning like the trucking industry? Yeah, like trucking, because there's just a lot less trade, you know, going through the ports and through the rail system and through the trucking system. Also housing construction broadly outside of data centers, you know, AI, it's in deep recession, you know, contracting. But at the end of the day, you know, the key to whether we go into recession or not is whether businesses begin to lay off workers or not. Stacey Vanek-Smith says it's the labor market that worries her the most too.

7:37The job market is in a really strange place. Fewer and fewer people are quitting and fewer and fewer people are hiring. This deep freeze that you're talking about. Deep freeze, yes. And I think the problem with that is what it's showing is a job market where everybody's kind of clinging onto the job they have. And that puts people in weird positions. If you don't feel like you've got options as a worker. That means, are you going to ask for a promotion? Are you going to ask for a raise? Are you going to, you know, take a chance? Probably not. You're just kind of waiting it out, waiting until things get better.

8:10And in the meantime, you are still having to buy things, still having to get groceries, still having to pay rent. Yes. So I want to talk about inflation this past year before we talk about what we're expecting next year. What we anticipated this year was that after the Liberation Day tariffs, prices would skyrocket. That hasn't quite happened, but inflation is still weighing on people, right? This is so interesting because, yes, this is exactly why all the recession fears really took off after Liberation Day. There was this idea of, oh, no, if we're taxing imports from China at 50 percent, like that is going to immediately trickle down to store shelves.

8:52That has not happened. I mean, inflation is still a little bit higher than we want. It's just over 3%, but not anywhere near, I think, what we feared it would be. I think there are a few reasons for that. Harvard has a great, it's called the Pricing Lab, led by Alberto Cavallo. Yeah, Cavallo has studied this a lot. And what he found was there's often a lag between when tariffs are imposed, companies will often hesitate to raise prices. They don't want to lose customers. They don't want to raise prices before the competition. But Cavallo did say he thought price rises were coming. Also, though, the tariffs have changed a lot since Liberation Day.

9:29They're here, they're gone. So a lot of the tariffs didn't end up happening or are still kind of in debate or in a gray area. Well, let's talk about how consumers are behaving in today's economy. Consumer sentiment is low, but spending hasn't really slowed. The top 10 10 percent of earners are driving nearly 50 percent of the spending. There's this bifurcation going on. How are consumers feeling and how are they acting and why does that matter? To me, that's maybe the most important economic story of the year. People will often refer to this as the K-shaped economy, just meaning that one part of the economy, the upper leg of the K, is like kind of getting wealthier and wealthier and wealthier.

10:12These are people who have money in the markets. Then there's a part of the economy that isn't necessarily super invested in the markets, that is not invested in AI. Just look, the regular working person, that is the leg of the K that's going down. And for those workers, things are pretty rough. I mean, yes, inflation isn't so bad, but if you look across like to when the pandemic started, food is more than 30 percent more expensive than it was. Rent is hugely more expensive. Electricity costs are 40 percent more expensive. So we're in a situation where a lot of people in the economy are just feeling really squeezed.

10:52This is not a healthy, stable situation. You want everyone in an economy doing better and better. You don't want just one part of the economy doing better. that's really unstable. It's a bad recipe. Well, so, I mean, what is the outlook for the consumer heading into 2026? You've painted a pretty grim picture, but what is the data telling us about how this might evolve next year or deepen? Well, this is the thing about the Alice in Wonderland economy. Consumer sentiment is terrible. It's like near the lowest levels it's been in decades. People are feeling horrible about the economy. I think a lot of that's the job market.

11:28So when the holiday spending season happened, especially Black Friday, which is this big measure, I thought it was going to be a real disaster. For retailers, a lot of them make a third of their money around this time. This is a big, big deal. Retail sales did great. They looked great. Somehow we feel terrible. We're spending more than ever. Yeah, this is just like. It's confounding. It's confounding. It's through the looking glass. Yes, it is the cognitive dissonance that is the 2025 economy. After the break, the tailwind that's been keeping the U.S. economy growing. And what could happen next year if the winds shift?

12:18I think AI has saved our bacon. Artificial intelligence. Stacey Vanek-Smith, the host of Bloomberg Businessweek's Everybody's Business podcast, says the companies developing AI, the chips they're buying, the data centers they use for power, it's all driven the stock market in 2025. I saw this great chart. It was basically the S &P 493, meaning the S &P 500 minus what they call the Magnificent 7 stocks. Those are the stocks really driving the economy right now. All of them are very interwoven with AI. It's Google, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla. And if you take them out and you look at what happened with the S &P 500, subtracting the Magnificent 7, it's essentially flat.

13:05Wow. Basically single-handedly responsible for all of the market growth we saw this year. But AI is a little tricky because right now it's creating a lot of jobs because of data center construction, because AI is notoriously, like, really thirsty. It needs a lot of juice. So data centers are going up. And also companies are kind of expanding. What Mark Zandi said to me was he was like, we're walking a really fine line. He's like, if AI replaces as many jobs as quickly as people are sort of dreaming it will, then that's going to cause a crisis in the job market. And if it doesn't grow fast enough or doesn't live up to those promises, the markets are going to panic.

13:46So there is a fine line, a soft landing of AI that needs to happen. There's a kind of a narrow needle to thread. Moody's Analytics chief economist Mark Zandi again. I think we're going to be able to do it, but that's why recession risks are so high, because it is a narrow path that we have to make our way through without a downturn. I mean, what might happen to tip the scale either way, to bring the economy closer to a potential recession or to really stabilize it and bring it closer to that 15 percent number? Well, the kind of the risk that's kind of top of mind is the runaway stock market, the surge in AI stock prices in particular, valuations are very high.

14:26Now, I'm on board with the idea that AI is a big deal. It's going to raise productivity growth. And we are going to see gains in profitability that will support higher stock prices. But it just feels like stock investors are kind of over their skis and feels like speculation starting to creep into the market. What I mean by that is that investors are starting to purchase these stocks simply because they've risen in price in the recent past and have concluded, therefore, a rise consistently going forward. And generally, when you get into that kind of a market, it's at risk of correcting. That's not my baseline.

14:59But I think if you had said, what would be the most likely downside scenario where we could go into recession? The other thing to point out is the run-up in stock prices has been critical to growth because it drives up wealth. And through wealth effects, consumers that are very well-to-do and own the stocks are outspending. So if you construct a scenario where price is correct, then that wealth effect goes from positive to negative. And that knocks one of the legs out from the economy's growth and thus the higher risks of recession. So that's the downside risk. But Mark also laid out the potential upside, things that could push the recession risks lower.

15:37We've got a lot of stimulus coming. Deficit finance tax cuts. You know, that's when the one big, beautiful bill act, you know, cuts taxes for businesses through accelerated depreciation. And we're going to get some individual tax cuts, lower taxes on tips, overtime, salt deduction, that kind of thing. And it's all deficit finance, just so that provides near-term stimulus. Obviously, it raises our deficits in debt, but it does support growth. And that could be more of a tailwind in 2026 than I'm anticipating, and we get a better year than I expect. So, you know, say we dodge another bullet, We don't have a recession next year.

16:13But what are the concerns about an economy that continues in the trajectory that it's been going right now? I've been a professional economist for 35 years, and I've been following the fiscal situation over that period of time. And I look at three indicators to gauge the fiscal health of the nation, debt to GDP, deficit to GDP, and interest payments as a percent of GDP. In that 35 years, I've never had a time when all three of those indicators at the same time are screaming, we got a big problem. Our fiscal situation is really problematic and the direction of travel is very disconcerting. If we don't change policy and stay on the same path, then all these indicators are going to keep moving in the wrong direction.

16:56At some point, it's going to lead to much higher interest rates and it's already corrosive on the economy. So that's one key thing that we need to address. And at some point, there will be a cliff event. it will boil over and be a serious problem. Interest rates will spike. It could be a year from now. It could be 25 years from now. But it feels like if we don't change something, that's going to be the case. It doesn't mean we're going to recession next year, but it does mean at some point there's going to be some form of day reckoning. In fact, I go far as to say, Sarah, I'm not sure we'll ever generate the political will necessary to make these hard choices unless we actually do have a cliff event.

17:30We have a spike in interest rates and have a crisis to to catalyze the political will necessary to make these changes. So that's something, you know, I think we're going to have to grapple with. I don't know that that's a 2026 event, but that's an event in our future if we don't change something. On a lighter note, to wrap up here, if you were the U.S. economy, what would your New Year's resolution be? My New Year's resolution, I mean, my New Year's wish would be, you know, hey, guys, could we just, you know, come together and solve this immigration problem? Because there's no better thing than we can do to address our both near and long term economic problems and coming up with a rational immigration plan to allow for more immigrants into the country.

18:19Goodness knows we need immigrants of all skill levels, low skilled, medium skilled, high skilled. We need immigration reform. We need a rational immigration policy. Let's just come together. That would be my New Year's wish for 2026. And if that happened, then I think, you know, we'd be in a much better place in 2026 and in 2036. I asked my colleague Stacey the same question. Any economic resolutions? So if I were the U.S. economy, my New Year's resolution would be everything in moderation. I would just be like, you know, just don't overdo it. Slow and steady. Just like toe the line. Toe the line.

18:59Yes. Go back through the looking glass, back where like jobs numbers make sense with the markets, make sense with consumer spending, where it all looks like, yeah, go back to normal. We're hoping for clarity and stability in 2026. Yes. Yes. Clarity and stability sound amazing. Let's do that.

19:43Thank you.