Recession worries seize the market. How to really know what’s coming.

President Donald Trump’s tariff policies have created uncertainty, along with a pullback in consumer and business confidence. The New York Federal Reserve Bank’s February Survey of Consumer Expectations released Monday found that 27.4% of households expect their financial situation will be worse a year from now, the highest level since November 2023.

The latest NFIB Small Business Optimism Index released Tuesday was no better, showing a decline for the second month in a row, falling by 2.1 points to 100.7. Business uncertainty soared to the second-highest level in the 50-year history of the NFIB survey.

The pullback in confidence has generated speculation that a sentiment-driven recession could be in the cards this year, a possibility Trump wouldn’t rule out during an appearance on Fox News on Sunday. He said, “There is a period of transition, because what we’re doing is very big."

The comments sent markets into a tailspin on Monday, yet sentiment data has been a bad economic indicator in the past few years, says Philipp Carlsson-Szlezak, Boston Consulting Group’s global chief economist. “The new administration’s policy may spur excitement or despair amongst two different neighbors, but their spending patterns are unlikely to change meaningfully as long as their jobs continue to provide spending power."

So what is worth watching to assess the risk of a recession? Several leading economists are focusing on spending and labor data to determine the path ahead for the U.S. economy.

Consumer Spending

Americans’ spending has driven economic growth in recent years, representing nearly 68% of the nation’s gross domestic product growth in the fourth quarter, according to the Bureau of Economic Analysis. Given its importance in maintaining economic momentum, economists are watching trends in consumer spending for signs of potential cracks.

A key indicator will be retail sales, which slipped 0.9% in January from December, according to the latest Census Bureau data. January’s pullback was expected after a busy holiday spending season. More notable will be if there’s another soft month of retail spending, says PNC Chief Economist Gus Faucher. Weaker February and March data could signal that federal employees are turning cautious or that high-income households could be affected by a sustained stock market downturn. The February reading of retail sales is set to publish Monday, March 17.

Early credit-card spending doesn’t paint a strong picture. Bank of America aggregated card data released Tuesday found that credit- and debit-card spending per household declined 2.3% year over year in February. That’s compared with a 1.9% rise in January.

Household savings rates may also be worth watching, given that the bulk of savings comes from high-income households, Sonola says. This is the same cohort who has been on a spending splurge, so if they stop and start saving more as a response to the market downturn, that’s a worrying sign for economic growth.

For now, consumer health seems relatively stable, but that could shift with little notice and so it is worth watching the incoming data. “The reality is that the threat of a recession is real and can materialize quickly," Olu Sonola, U.S. head of economic research at Fitch Ratings.

Business Investment

Consumer spending may be the biggest driver, but economists also are analyzing business spending and capital expenditures for signs that the sentiment slump is translating into action.

Looking at the history of contractions in economic growth going back to the 1970s, Sonola found that the majority of downturns were led by a pullback in business investment. Yet getting real-time feedback on business activity is difficult.

So far, the business data from the start of the year has been solid. Overall, new orders and shipments of capital goods were up by 3.1% in January, according to the latest data available from the U.S. Census Bureau. Orders excluding defense and aircraft spending, a better proxy for the private business investment component of GDP, were up slightly.

Economic activity in the manufacturing sector expanded for the second month in a row in February, while activity in the services sector was similarly strong, according to the latest ISM reports.

Business’ current performance and revenues were down slightly during the last two weeks of February, though by no means among the lowest readings in the past year, according to the Census’ Business Trends and Outlook Survey.

Labor Conditions

Ultimately, the economic outlook hinges on labor conditions. “The labor market has been the cornerstone of consumption and economic strength," Carlsson-Szlezak says. He is monitoring wage growth and payrolls, both of which remained largely stable in February. “While wages are a lagging indicator, it is hard to think that the labor market is very weak when wage growth has accelerated a touch very recently. While it may be much cooler than it was a couple of years ago, it remains quite strong," he said.

Economists are also monitoring the number of Americans who are filing for unemployment benefits to determine if there’s an uptick in layoffs. Weekly jobless claims fell back by 21,000 to 221,000 in the week ended March 1, while the four-week moving average of claims was virtually unchanged near the level seen in mid-December.

Placement firm Challenger, Gray & Christmas reported last week that U.S.-based employers announced 172,017 job cuts last month, a 245% increase from the 49,795 cuts announced in January. Yet Tuesday’s release of the Job Openings And Labor Turnover survey showed that the rate of layoffs actually declined 0.1% in January, registering 1.6 million during the first month of the year.

While Faucher says that the Challenger data is fairly timely and worth watching, it hasn’t correlated well with job growth in the past. Instead, he places a higher premium on the jobless claims data given it is broad-based and has geographic details.

Additionally, a more forward-looking measure of hiring strength, the Indeed Job Postings Index, has shown that the number of new positions posted has been largely flat in February compared with a year ago.

The bottom line is that it may take another few months to determine whether a recession is really in the cards. The initial estimate of first-quarter real GDP growth is set to be released April 25. Faucher is still forecasting 1.5% growth during the first quarter, significantly slower than 2.3% growth in the fourth quarter of 2024, but not a contraction by any stretch. The recession risks have increased in recent months, but Faucher still estimates that there is still only a one in three chance of a downturn this year.

“I look at the numbers and there’s still a lot to like about the economy," Faucher says. “If we had less uncertainty, that would be better."