How Healthy Is the US Economy? Here’s What the Top Economic Indicators Say

Fears of a recession are back on investors’ minds. But predicting the onset of an economic downturn, let alone the length and severity of one, is difficult even for the experts.

As a rule of thumb, two quarters of gross domestic product contraction is generally accepted as a recession, but the official start date is declared by the Business Cycle Dating Committee of the National Bureau of Economic Research.

While we often don’t know we’re in a recession until it‘s well underway, here are some economic signals worth watching to get a sense of the economy’s health.

What Are the Key Economic Indicators?

These indicators can help give us a better understanding of where the economy and the markets stand, but they can’t perfectly predict the future. Further, many of these measures are affected by a variety of factors that may or may not point to a recession, so interpreting the data isn’t always cut-and-dried.

Here are some of the key indicators that economists track to understand economic health and where we might be headed.

• Real GDP. A prolonged slowdown or outright decline in GDP growth may be a cause for concern. The general rule of thumb is that two quarters of contraction can be considered a recession.
• Consumer spending. Consumer spending is the largest component of GDP. Consumers tend to tighten their belts in response to economic uncertainty, which can lead to lower economic output.
• Employment. Recessions tend to stifle wage increases and promotions, and they may trigger layoffs. Higher initial jobless claims and lower or declining job growth may be signs of a recession.
• Inflation. Inflation tends to rise during periods of economic expansion. The opposite is usually true during contractionary periods, but persistent high inflation without corresponding economic growth may cause consumers to cut back on spending.
• Interest rates. High inflation may cause the Federal Reserve to raise interest rates to contain it. In contrast, the central bank may lower rates to encourage borrowing and bolster job growth at the risk of raising inflation.
• Yield curve. An inverted yield curve occurs when short-term bond yields are higher than those of longer-term bonds. This indicates future expectations of lower interest rates, and thus lower growth and inflation. Inverted yield curves have historically occurred ahead of recessions.
• Stock market performance. While the stock market and the economy don’t always move in tandem, economic uncertainty can prompt market selloffs.

We’ll take a closer look at where these indicators stand. Keep in mind that it can take time for the data to catch up to what‘s going on because most of our traditional economic data is released at least a month behind when it happened.

GDP Growth Has Slowed in the First Half of 2025

Data as of June 30, 2025.

Gross domestic product is a key measure of economic health. GDP is the monetary value of all finished goods and services made within a country during a certain period, and it‘s used to estimate the size of the economy. GDP growth year over year indicates a healthy economy, while slowing growth or an outright decline can be cause for concern.

Preliminary GDP data released by the US Bureau of Economic Analysis showed that economic growth grew 3% in the second quarter of 2025, following a 0.5% contraction in the first quarter. As Morningstar senior reporter Sarah Hansen noted, that contraction was largely driven by a spike in imports, as US companies stocked up ahead of widespread tariffs.

GDP growth for the first half of 2025 is down from recent years. Morningstar Senior US Economist Preston Caldwell acknowledges that GDP tends to be volatile, but he expects the slowdown in economic growth to continue as consumers get more cautious.

Consumer Spending at Odds With Consumer Sentiment

Data as of June 30, 2025.

Consumer spending accounts for just under 70% of US GDP. As the largest component of the economy, it is one of the main determinants of the country’s economic health.

In the second quarter of 2025, real personal consumption expenditure increased by 1.4% from the previous quarter. First-quarter spending is often the lowest of the four quarters, as consumers cut back after the holidays and leading up to summer travel.

While the latest spending data doesn’t sound any alarms, consumer sentiment is still significantly lower than in 2024, according to research from the University of Michigan. Consumers are pessimistic, but that pessimism hasn’t fully translated into a pullback in spending. The question that economists have is whether the spending data will catch up with how consumers are feeling.

Labor Market Weakens as Unemployment Ticks Upward

Data as of Aug. 31, 2025.

There are multiple ways to look at the health of the US labor market, which is tied to the overall health of the economy. Job growth is a primary indicator. The monthly nonfarm payrolls report from the Bureau of Labor Statistics shows the change in the number of workers in the US, with some exceptions like farming, active military, and self-employment.

The US economy added just 22,000 jobs in August as unemployment continued to rise. That number is well below what economists had previously expected and the 79,000 reported in July. The revised June numbers from the Bureau of Labor Statistics show that the US economy lost 13,000 jobs in June.

Morningstar’s Sarah Hansen points out that the weakening labor market could push the Federal Reserve to implement additional rate cuts through the end of the year.

Inflation Remains Sticky Amid Tariff Impacts

Data as of July 31, 2025.

The Consumer Price Index increased 2.9% on an annual basis in July, up from 2.7% in June. On a monthly basis, the CPI increased 0.4%. The Core CPI, which excludes volatile food and energy costs, was up 3.1% from 2024.

Consumer prices have trended up in response to tariffs, as producers started passing along higher import prices. For now, US companies are still shouldering much of the burden, but that could change in the coming months.

September Federal-Funds Rate Cut May Lead to More in 2025

Data as of Sept. 17, 2025.

The Federal Reserve’s dual mandate requires it to promote maximum employment while holding prices steady. The central bank typically aims to hold long-run inflation at an annual rate of 2%, as measured by the Personal Consumption Expenditures Price Index. The Fed’s two goals of high employment and low inflation are often at odds with each other, so managing them is a balancing act.

The Fed lowered the federal-funds rate by 0.25 percentage points on Sept. 17, in a move that had been widely anticipated as job growth weakened.

As Morningstar’s Caldwell explains, the risks in the labor market call for looser monetary policy, as economic slack counterbalances the inflationary impact of tariffs. Caldwell expects additional rate cuts in 2025.

Inverted Yield Curve Reflects Higher Short-Term Yields

Data as of Sept. 17, 2025.

The yield curve measures the yield to maturity of bonds across various maturities. The curve normally slopes up and to the right as investors need a higher yield to take on additional risks that occur over longer time horizons. An inverted yield curve may indicate an expectation of lower interest rates, and thus lower growth and inflation, in the future.

The spread, or difference in yield, between 10-year and three-month Treasury yields is a common metric used to quantify the shape of the yield curve. A negative spread indicates an inverted yield curve because the 10-year issue has a lower yield than the three-month. Negative spreads have historically preceded recessions.

The 10-year yield has passed the three-year, but overall short-term yields remain high. Yields at the short end are closely tied to the Fed’s short-term policy rate. When the Fed increased its short-term policy rate to fight inflation in 2022, the yields on short-term Treasury bills followed suit. Treasury yields across most of the curve rose in response to Fed rate cuts in 2024, but uncertainty has caused longer-term yields to waver in 2025.

Stock Market Continues to Rally on Fed Rate-Cut News

Data as of Sept. 17, 2025.

It‘s easy to think that the stock market and the economy would always go hand in hand, but here are some reasons they don’t:

1. The stock market doesn’t represent everyone participating in the economy, and a significant amount is owned by the wealthiest individuals.
2. It’s disproportionately made up of large corporations, while small businesses are a major driver of the US economy.
3. Stock prices reflect investor confidence in the future. Things like spending and employment are indicators of the current economic climate.

The stock market might reflect changes in the economy and vice versa, but the state of one doesn’t necessarily paint the full picture of the other. Still, it’s worth keeping an eye on the markets as recession concerns crop up.

After US President Donald Trump announced tariffs in early April, stocks quickly plunged over the next week, as the Morningstar US Market Index fell 20% from its highest level. Shortly thereafter, the markets bounced back in response to a 90-day pause on the tariffs. Stocks ultimately recaptured the losses from the initial fallout and continue to rally.

The market got a boost in August as Federal Reserve Chair Jerome Powell signaled a potential September rate cut. Morningstar Chief US Market Strategist Dave Sekera sees ongoing trade and tariff negotiations as one of the most pressing near-term risks to the market.

How Should We Interpret Economic Indicators?

No single indicator tells the whole story of economic health, so we shouldn’t look at any one data point in isolation. Even interpreting GDP growth, which is the primary indicator of economic health, can be difficult in the short term because of noise in the data. Plus, there are nuances that may affect how we interpret what we’re seeing, and even comprehensive historical data can’t perfectly predict the future.