The United States is rapidly heading toward a recession. | News | Aurica
The United States is rapidly heading toward a recession.
Wednesday, March 5, 2025
In December, when much of the country was riding a wave of optimism over Donald Trump's presidential victory, I warned that we were hurtling toward a recession (and said that it may have already begun). I also pointed out that the growing likelihood of a recession would drive up gold prices (and the recent rise is clear confirmation of this).
My prediction was not motivated by political bias, but by hard data and reliable recession indicators, which had signaled economic problems long before Trump's victory. And now, as expected, a growing body of evidence confirms that the odds of an imminent recession in the United States are increasing.
A key indicator pointing to an impending recession is the Atlanta Federal Reserve's GDPNow forecasting model, which is updated in real time as new economic data comes in. Last Thursday, the model projected an annual growth rate of 2.3% for the first quarter of 2025. However, after Friday's economic data release, that estimate plummeted to a recessionary -1.5%.
Then, on Monday, additional data caused the forecast to fall even further to a staggering -2.8%, reinforcing the recession warning and silencing skeptics who doubted Friday's sharp drop.
When the GDPNow estimate for first-quarter 2025 growth plummeted to -1.5% on Friday, some skeptics argued that the drop was skewed by a temporary surge in imports. U.S. importers had been rushing shipments ahead of impending tariffs, they claimed, creating an anomaly that would soon normalize.
While there is some truth to that, it is only part of the story. A major factor contributing to the decline in GDP estimates is weakening consumer spending, which drives more than two-thirds of U.S. economic activity.
In January, consumer spending contracted for the first time in nearly two years, as fears of rising inflation led many to pull back.
In addition, Monday's sharp drop in the GDPNow estimate for first-quarter 2025 growth was largely driven by a steep decline in residential investment (spending on new homes and home renovations).
Given that housing contributes between 15% and 18% of US GDP, this slowdown is a significant drag on economic growth.
What is surprising is that today's drop to a GDP contraction of -2.8% marks the worst forecast since the COVID lockdowns in 2020.
One of the main reasons I have been warning about a recession in recent months is that predicting it is not that complicated, especially when we consider historical patterns. The most important factor is the near inevitability of recessions following rate hike cycles, as shown in the chart below.
In general, the Federal Reserve raises rates until “something breaks,” and that something is usually industries or speculative booms that flourished in the previous low-rate environment.
Over the past three years, the Federal Reserve has embarked on an aggressive cycle of rate hikes, pushing the federal funds rate from near zero to a peak of 5.3%, the fastest increase since the early 1980s.
Recently, they cut rates to 4.3% amid growing signs of economic weakness. The tightening cycle had been even more extreme than the mid-2000s hikes that helped trigger the housing market crash and subsequent Great Recession.
Although many economists and investors remain hopeful for a soft landing, history shows that such outcomes are rare, especially after rate hikes of this magnitude.
This time around, I believe the US economy will be dragged into recession by the bursting of what I call the “everything bubble,” a term I coined in 2014 to describe the multiple financial and asset bubbles inflated during the era of unprecedented quantitative easing (QE) and zero interest rate policy (ZIRP) after 2008.
In the US, this includes bubbles in real estate, equities, emerging tech companies, artificial intelligence, much of the cryptocurrency sector, healthcare, higher education, and auto loans. Outside the US, equally fragile real estate bubbles in Australia, Canada, and Western Europe add to global economic risks.
Let's not kid ourselves: there are likely many other risks lurking beneath the surface, waiting to be exposed in the next recession. As billionaire investor Warren Buffett said, “Only when the tide goes out do you discover who's been swimming naked.”
Several key indicators are warning of an impending recession, or even suggesting that we may already be in one.
Among the most reliable is the yield spread between 10-year Treasury bonds and 2-year bonds, which is calculated by subtracting the yield on 2-year Treasury bonds from the yield on 10-year Treasury bonds. This measure has accurately predicted the last six recessions. When the spread falls below 0%, it indicates an inverted yield curve, one of the strongest predictors of an impending recession.
As shown in the chart below, the shaded gray areas represent past recessions, clearly illustrating the historical correlation between yield curve inversions and economic downturns.
Another yield curve-based recession indicator is the New York Federal Reserve's Recession Probability Model, which estimates the probability of a recession in the next 12 months. As this indicator rises, so does the probability of a recession.
However, when it begins to fall, it coincides with the yield curve inversion, a sign that the economy is likely already in recession.
Over the past year, this indicator has begun to decline, suggesting that, unfortunately, the US economy is already in recession.
As I mentioned earlier, I believe the US is in the midst of another housing bubble — what I call Housing Bubble 2.0 — and I expect its collapse to be a major trigger for the next recession.
Simply put, inflation-adjusted US home prices have already surpassed the peak of the mid-2000s housing bubble that led to the 2008 collapse. Remember The Big Short? We have made the same mistake again.
Housing has become so expensive that, in order to buy a median-priced home of $433,100, Americans now need an annual income of $166,600, even though the median household income is just $78,538, as Fortune recently reported.
This level of imbalance is unsustainable, and history has shown us exactly how it ends: with a collapse of the real estate market.
The severe unaffordability of housing in recent years has driven existing home sales to their lowest levels since 1995, even though the US population grew by 80 million during that period.
This is a clear sign of a deeply dysfunctional market that cannot be sustained indefinitely. Sooner or later, something will have to give, and that something will be housing prices returning to reality.
The Federal Reserve's stimulus during the pandemic artificially inflated housing prices to irrational levels, driving an increase in home construction.
Now, as those newly built homes hit the market, an oversupply is emerging, particularly in the Sun Belt region. This type of excess inventory is a classic warning sign that often precedes a housing crisis.
As home sales stagnate due to lack of affordability and inventory continues to rise (with even more on the way), housing starts have entered a recession. This decline is a classic indicator of recession, heralding broader economic weakness ahead.
Another key indicator of the health of the US housing market is homebuilder stocks, which are tracked by the SPDR Homebuilders ETF (XHB). Right now, these stocks are beginning to rebound, just as they did in 2005, before the housing market crash that followed a couple of years later.
A decisive close below the $96 to $100 support zone would signal the start of a deeper bear market in housing and homebuilder stocks, which will spread to the entire US economy and accelerate the recession.
In addition to the real estate market, another major bubble that I believe will burst is that of US stocks. Numerous indicators confirm that the stock market is dangerously overvalued and poised for a mean reversion, a correction that will drag down inflated stock prices and serve as both a symptom and catalyst for the coming recession.
One of the clearest signs of this excessive valuation is the cyclically adjusted price-to-earnings ratio (CAPE) of the S&P 500, which compares the current price of the S&P 500 to its average earnings over the past 10 years.
Historically, when this metric reaches extreme levels (20 and above), sharp market declines tend to follow.
Technology stocks, in particular, are hugely inflated, as evidenced by the Nasdaq 100 adjusted for US M2 money supply, which represents the total amount of dollars in circulation. This metric reveals that the Nasdaq 100 (and tech stocks as a whole) are now even more overvalued than during the dot-com bubble of the late 1990s, which ended in a spectacular crash.
When the “bubble of everything” bursts, triggering a severe recession (or, more realistically, a depression), the Federal Reserve and the US government will do everything possible to prop up the economy.
This will include reducing interest rates to zero (and even into negative territory), while abruptly ending the current policy of quantitative tightening (QT) and reviving quantitative easing (QE).
In doing so, they will digitally create hundreds of billions (eventually trillions) of new dollars in a desperate attempt to stabilize financial markets and the broader economy.
Gold has a remarkable ability to anticipate recession risks and the monetary stimulus that usually follows, two factors that are very favorable to its price. This is one of the main reasons why gold has risen over the past year, leaving many puzzled.
As the next recession unfolds, I expect gold to continue its upward trajectory, with silver eventually catching up, as it historically tends to lag behind before making its move.
In short, the risk of a recession in the United States is rapidly increasing, and I expect it to involve the bursting of several bubbles within the “bubble of everything,” particularly in real estate and the stock market.
Unfortunately, this economic crisis was already underway long before Trump won the election, leaving him with little ability to prevent it.
This impending recession will cause serious damage to traditional investors, who are heavily exposed to oversupplied markets such as housing, stocks, and cryptocurrencies.
However, for those positioned in precious metals—a small but savvy minority—it will be highly profitable and beneficial.
