Economic Data Points to Potential Slowdown
Concerns about economic growth have intensified as the Conference Board's Leading Economic Index (LEI) for the US declined by 0.3% in September 2025 to 98.3, after also declining 0.3% in August. The LEI has now declined for 15 of the past 18 months—typically a clear recession warning signal.
Overall, the LEI fell by 2.1% over the six months between March and September 2025, a faster rate of decline than its 1.3% contraction over the previous six-month period. The weaknesses among the leading indicators remained widespread, with only 3 out of 10 components advancing between March and September 2025.
The 3Ds Recession Framework
The Conference Board's "3Ds" rule signals an impending recession when: 1) the six-month diffusion index lies at or below 50; and 2) the LEI's six-month growth rate (annualized) falls below the threshold of -4.3%. While not all criteria have been met simultaneously, the trend is concerning.
The Conference Board, while not forecasting recession currently, expects GDP to grow by only 1.6% in 2025, a substantial slowdown from 2.8% in 2024. Their assessment suggests that economic activity should continue expanding in the near term but will slow at the close of 2025 and into early 2026.
Tariff Impact on Growth
A major driver of this slowdown has been higher tariffs, which already trimmed growth in the first half of 2025 and will continue to be a drag on GDP growth in the second half of this year and into early 2026. Trade policy uncertainty has complicated business investment decisions and contributed to manufacturing sector weakness.
Yield Curve Analysis
The 10-Year Treasury minus 2-Year Treasury spread inverted in July 2022 and remained negative for nearly two years—the longest inversion since 1978. Yet as of October 2025, with the curve having normalized to +0.55%, no recession has materialized. This has led some economists to question whether the traditional yield curve recession signal remains reliable in the current environment.
The normalization of the yield curve following Fed rate cuts may actually be a concerning signal, as historically recessions have often begun after the curve un-inverts rather than during the inversion itself.
Federal Reserve Policy Response
The Federal Reserve has responded to slowing growth by cutting rates three times in 2025, bringing the federal funds rate to 3.5%-3.75%. However, persistent inflation concerns have constrained the Fed's ability to ease more aggressively, creating tension between supporting growth and maintaining price stability.
Fed Chair Powell has acknowledged there is "no risk-free path" as the central bank navigates this challenging environment.
Why This Matters to Investors
Softening leading indicators carry significant implications for investment strategies. While the economy has shown remarkable resilience, the preponderance of warning signals warrants attention.
Investors should consider:
- Defensive positioning in consumer staples and utilities
- Quality bias toward companies with strong balance sheets
- Precious metals exposure as a hedge against uncertainty
- Cash reserves for potential buying opportunities if markets decline
The timing and severity of any economic slowdown remain uncertain, but the accumulation of negative signals suggests increased vigilance is warranted.
Sources: Conference Board, YCharts, S&P Global, FRED