July 2025 Economic Forecast: Progress on a Rough Path

EconCurrents‘ Economic Index modestly improved. There is currently one active recession indicator, with several past indicators showing signs of re-emerging. We examine the current recession risks, noting that the retail sales to population ratio growth declined. Read on to understand the currents affecting our economic growth.

Overview of this Economic Forecast

This post will summarize the:

• the recession outlook

• special indicators,

• leading indicators,

• predictive portions of coincident indicators,

• review of the technical recession indicators, and

• interpretation of our index – EconCurrents Economic Index (EEI) – which is built of mostly non-monetary “things” that are indicative of the direction of the Main Street economy at least 30 days in advance.

The Consensus Recession Outlook

The prevailing view among economists and major financial institutions is that the probability of a US recession in the near term remains elevated compared to historical norms, but the consensus has shifted away from an imminent or inevitable recession. Instead, most forecasts point to continued slow or weak growth, with significant risks still present.

Current Recession Probability Estimates:

Recession probabilities for 2025 range from 22% to 40%, with most estimates trending downward recently due to improved economic data and policy moderation. This is higher than the long-term average of 15.16% but significantly lower than the 50%+ probabilities seen in mid-2024 and early 2025.

• J.P. Morgan: As of May 2025, J.P. Morgan estimates a 40% chance of a U.S. recession by the end of 2025, down from 60% earlier in the year, citing reduced trade tensions and tariff policy adjustments.

• Goldman Sachs: In June 2025, Goldman Sachs lowered its 12-month recession probability to 30% from 35%, reflecting stronger economic data and easing trade policy uncertainty.

• New York Fed: The New York Fed’s recession probability model indicated a 27% chance of a recession within the next 12 months as of May 2025.

• Statista: Projects a 33.56% recession probability by November 2025, a decrease from the prior month.

• Kalshi: Prediction markets on Kalshi reported a 28% chance of a recession in 2025 as of early June, down from 70% a month earlier, driven by stronger economic indicators like GDP growth and cooling inflation.

• Polymarket: As of June 2025, Polymarket estimated a 22-23% chance of a recession in 2025, a significant drop from 66% in April.

Most economists and analysts expect the US to avoid a full-blown recession in 2025, though the risk remains higher than usual. The economy is expected to experience slow or lackluster growth, with ongoing headwinds from trade policy uncertainty, cautious consumer spending, and potential job cuts in some sector. The Federal Reserve has revised its GDP growth forecast downward, but still anticipates positive (albeit weak) growth for the year.

Factors Which Could Affect the Outlook:

Tariff and Trade Policy continues to dominate the pro-recession outlook. Recent easing of trade tensions and tariff rollbacks have reduced immediate recession risks, but future policy changes could still pose surprises.

A sharp drop in Consumer Confidence and Spending could tip the economy into recession, but so far, fundamentals such as household balance sheets remain relatively solid.

The Labor Market’s unemployment remains low, which is helping to buffer the economy against a downturn.

Inflation and Fed Policy remains above target, creating a challenge for policymakers, but the Fed is expected to maintain a cautious approach.

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Current View Of Consumer Spending

Consumer spending in the United States is expected to rise by 2.3% year-over-year in 2025, according to J.P. Morgan Research. This marks a slowdown compared to the robust growth seen in previous years, such as the 6.4% increase in 2023 and 9.8% in 2022.

Fitch Ratings projects an even more modest average growth rate of 1.5% for both 2025 and 2026, down from 2.8% in 2024 and 2.5% in 2023, indicating a clear deceleration in consumer spending momentum.

Both the J.P. Morgan and Fitch numbers are not inflation-adjusted. Currently retail sales is growing 3.1% year-over-year (YoY) but inflation adjusted growth (red line on image below) is up 0.9% YoY.

Gen Z (Born 1997–2012) continues to emerge as a powerful consumer segment, though their spending patterns are shaped by both opportunity and constraint. In 2025, nearly half of those increasing their retail spending are young adults aged 18–34, which includes Gen Z. However, this generation also reports high levels of financial anxiety: 32% of adults aged 18–44 (encompassing Gen Z and Millennials) worry about affording basic needs such as food, medicine, and housing. Gen Z’s average annual household expenditure in 2023 was $52,891, showing steady growth but still trailing older generations. Their spending is concentrated on housing, food, entertainment, and apparel, with notable tech-savviness and a tendency to prioritize value and social responsibility.

Millennials (Born 1981–1996) are significant drivers of discretionary spending. Over half of millennials across all income groups intend to “splurge” in 2025, especially on travel and jewelry, with high-income millennials (63%) leading this trend. However, millennials are also pragmatic; they often trade down by adjusting the quantity and pack sizes of their purchases, particularly in response to high food prices. Their average annual expenditure reached $81,589 in 2023, with substantial allocations toward housing, food, and experiences. Millennials remain digitally engaged and are comfortable making larger purchases, but a notable portion express anxiety over basic expenses.

Gen X (Born 1965–1980) is currently the highest-spending generation, with average annual household expenditures of $95,692 in 2023. This reflects their peak earning years and the financial responsibilities of supporting both children and aging parents. Gen Xers are less likely to trade down compared to younger generations, and many maintain established brand preferences despite inflation concerns. Their spending covers a broad spectrum—housing, healthcare, food, and entertainment—demonstrating robust purchasing power across categories. Gen X also shows a higher comfort level with making or considering large household purchases compared to younger adults.

Baby boomers (Born 1946–1964), many of whom are retired or approaching retirement, have more conservative spending habits. Their average annual expenditure was $70,207 in 2023, lower than Gen X and Millennials but still substantial. Boomers are the least likely to splurge on discretionary items, with only 20% reporting an intent to do so in early 2025—a figure that has declined further post-holidays. While they express concern about inflation, many boomers continue to adhere to established purchasing patterns and brand loyalties. Boomers are also more comfortable than younger generations with making or considering large household purchases, reflecting greater financial security.

Comparatively, younger generations (Gen Z and Millennials) are more likely to increase retail spending and splurge on discretionary categories, but they also experience higher financial anxiety and are more likely to trade down in response to price pressures. Older generations (Gen X and Boomers) show greater comfort with large purchases and maintain higher average expenditures, but are less likely to increase discretionary spending or alter established habits.

While consumer optimism remains relatively high, there is increased caution. Many consumers are trading down in some categories to splurge in others, and nearly half of the surveyed US consumers plan to delay purchases in the coming months. The main driver of consumer concern continues to be rising prices, even as overall inflation remains moderate.

The graph below shows only a 0.3% YoY growth in consumer spending per capita. It was trending up since April 2023 - but was in negative territory for approximately two years after January 2023.

Regardless, consumer spending growth has been weak for the last three years. It is unlikely that consumer spending will be the catalyst for stronger economic growth.

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