‘We’re looking at a slowdown’: 3 warning signs point to a U.S. recession. Find out what the indicators are and how to protect your finances in the months ahead

So what exactly defines a recession?

In the U.S., recessions are officially declared and dated — often retroactively — by the National Bureau of Economic Research (NBER) Business Cycle Dating Committee.

The committee defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”

In wider practice, two consecutive quarters of negative gross domestic product (GDP) growth point to a recession.

Though there hasn’t been an official declaration, there are three warning signs all pointing to a potential recession:

The yield curve is signaling a recession. One predictor of a recession is when the yield on 10-year Treasury bonds falls below that of the three-month Treasury bill.

This occurred in late 2022 and lasted until late 2024, and occurred again in late February — and the yield spread between the two remains negative.

The time from when this situation occurs until the onset of a recession can vary, but it’s a strong indicator of a recession in the coming 16 to 20 months.

Leading economic indicators are pointing to a slowdown. Another predictor is the Conference Board Leading Economic Index (LEI). This index fell%20in%20January.) in February for the third consecutive month. The Conference Board is forecasting that GDP growth will slow.

Data and sentiment are turning negative. Consumer confidence is dropping, recent data for retail sales has been weak and the Federal Reserve Bank’s Economic Policy Uncertainty Index is high. CEOs are more pessimistic, consumers are pulling back and “workers are getting nervous,” according to The Wall Street Journal. And the Federal Reserve Bank of Atlanta’s GDPNow forecasting model is predicting that GDP growth will retract by 1.8% in the first quarter of 2025.

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Be proactive to weather a downturn

All this talk of a recession may have you concerned. The best approach is to be proactive — but not panicked.

Build up an emergency fund. Prepare for potentially difficult times by setting aside an emergency fund that covers at least three months to a year of expenses, depending on how long you think it might take to get a job if you’re laid off. To boost your savings, investigate a high-interest savings account (HISA) or a high-yield savings account.

Pay down debt and avoid unnecessary expenditures. Servicing a large amount of debt could be a problem if your income declines or everyday costs go up (like egg prices). Avoid extra financial stress by creating a budget, paring down spending where you can and weighing large purchases carefully.

Protect or increase your income. You may want to look into a side hustle or second job to bring in some extra cash.

Talk to a financial adviser about how to maximize your investment performance. Make sure your portfolio is suitably diversified, including geographically, with exposure to sectors that perform better in a recession.

Most financial professionals advise against trying to time the market. Multiple studies show that staying in the market during downturns leads to better long-term returns, especially when you employ dollar-cost averaging — investing the same amount of money in the same securities at regular intervals regardless of their prices.

If you’ve been laid off, talk to your adviser about strategies that may make sense in low-tax years, such as a Roth conversion.

You may not have much control over whether there’s a recession, but you can take steps to weather the storm.