Credit Sesame explains why a small dip in GDP does not mean the next recession is here, but why it still makes sense to prepare for what could come next.
The Gross Domestic Product (GDP) of the United States declined at an annual rate of 0.3% in the first quarter of 2025. Coming at a time when people were already anxious about the impact of new tariffs and federal budget cuts, this drop in economic activity sparked serious concerns about where the economy is headed.
Any decline in GDP is unwelcome news. However, things would need to worsen significantly for this to qualify as a recession. Still, it might be wise to start preparing.
Certainly, any decline in GDP is not good news. However, things would have to get much worse for this to be considered a recession. Still, it wouldn’t hurt to take some steps to prepare.
Economic contractions are rare but not always recessions
Economic expansions occur when the economy grows, and contractions happen when it shrinks. These changes are measured after adjusting for inflation. In other words, the economy must grow faster than the inflation rate for it to count as an expansion. This inflation-adjusted growth rate is often referred to as the “real” rate.
Declines in economic activity have been rare since the end of the Great Recession
News that the economy shrank at a real annual rate of 0.3% raised concerns about a possible recession. That reaction stems, in part, from the rarity of contractions in recent years. Since emerging from the Great Recession in mid-2009, the U.S. economy has experienced only seven quarters of decline out of 63 — that’s just 11% of the time.
The rarity makes the latest decline unsettling, but one bad quarter does not constitute a recession. In fact, contrary to popular belief, even two consecutive quarters of economic contraction do not automatically meet the definition.
Defining a recession
The National Bureau of Economic Research (NBER) defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months.” That means three key conditions must be met:
- The decline must be meaningful.
- It must be widespread across different sectors.
- It must be sustained and not just a routine fluctuation from one month or quarter to the next.
The NBER intentionally keeps the definition somewhat subjective because, in some cases, one factor may outweigh the others. For instance, when the COVID-19 pandemic hit the U.S. in early 2020, the economy contracted for just two months, but by over 30%. That brief but dramatic downturn was enough to be considered a recession.
As for now, the 0.3% decline in the first quarter of 2025 is neither deep nor prolonged enough to count as a recession, at least not yet. Whether it becomes one depends on what comes next.
Mixed signals create uncertainty
Further complicating the picture is a stream of conflicting data. While GDP dipped, the decline was mild. April 2025 saw employment gains, though growth slowed compared to the previous month. In addition, earlier job growth estimates for February and March were revised sharply downward.
Consumers, who drive roughly two-thirds of U.S. economic growth, are also sending mixed messages. Consumer spending has risen over the past two months, yet consumer confidence has dropped for four months in a row. One explanation for this disconnect is that much of the recent increase in spending came from motor vehicle purchases. Concerned about potential tariffs, some consumers may be rushing to buy now, possibly leading to slower sales later and increasing recession risk.
So far, the economy is not in a recession. But there are enough warning signs to justify caution.
What happens in a recession and how to respond
To understand why people worry about recessions, it helps to consider some of the common consequences:
Unemployment typically rises
- What happens: As business slows, companies often cut jobs. Hiring is typically slow to resume even after the recession ends. The Great Recession began in January 2008 and ended mid-2009, but net job losses continued until February 2010. More than 8 million jobs were lost, and national employment did not return to pre-recession levels until May 2014. Many Americans faced prolonged joblessness.
- What to do: Reduce expenses and build emergency savings if possible. Evaluate how secure your job is, and consider whether you can improve your skills or transition to a more stable employer.
Credit becomes harder to get
- What happens: Job losses often lead to missed debt payments and lower credit scores. At the same time, lenders grow more cautious and tighten lending standards. The result is that fewer people qualify for credit.
- What to do: Strengthen your credit score now. Pay down debt, avoid taking on new credit unless necessary, and create a budget that fits your current income. Get a complete view of your credit score for free.
The stock market gets volatile
- What happens: Economic troubles often hurt the stock market, but not always in obvious ways. Investors tend to act in anticipation of events. That means markets may start falling before a recession is confirmed and start recovering before it ends.
- What to do: Avoid drastic reactions. By the time a recession is officially recognized, the worst may already be over for markets. Instead, rebalance your portfolio if needed and stay focused on your long-term investment goals.
Practical steps for uncertain times
Staying prepared is more helpful than trying to predict the future. A single quarter of decline does not mean a recession has begun, but it is a reminder to take stock of your finances. Focus on steady, practical actions that can strengthen your position. Build up your savings, keep your credit in good shape, and avoid taking on new risks without a clear plan. These habits can help you stay steady, even if the economy becomes more difficult in the months ahead.
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Disclaimer: The article and information provided here are for informational purposes only and are not intended as a substitute for professional advice.
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