Retail Sales Surprise: Is a US Recession Off the Table? Q4 2025

Retail $\text{Sales}$ $\text{Surprise}$: Is a $\text{US}$ $\text{Recession}$ $\text{Off}$ $\text{the}$ $\text{Table}$?

A surprising acceleration in $\text{US}$ retail sales through late $\text{Q3}$ and early $\text{Q4}$ of $\text{2025}$ has significantly brightened the economic outlook, challenging the recession forecasts that loomed large earlier in the year. Stronger-than-expected spending—especially in core retail categories—indicates that the American consumer remains remarkably resilient, despite persistent inflation and high interest rates.

However, while the latest retail data makes a near-term recession less likely, it is **not entirely off the table**. The economy is showing bifurcated strength, with high-income spending offsetting signs of stress among lower-income households.

Key Data Point (August $\text{2025}$):

Core Retail Sales $\mathbf{+0.7\%}$ $\text{MoM}$

(Excluding autos, gas, food, and building materials—a strong contributor to $\text{GDP}$.)

$\text{Why}$ $\text{Retail}$ $\text{Sales}$ $\text{Matter}$ $\text{to}$ $\text{Recession}$ $\text{Risk}$

Consumer spending is the engine of the $\text{US}$ economy, typically accounting for about **$\mathbf{70\%}$ of $\text{GDP}$**. When retail sales figures—which measure spending on goods and food services—come in strong, it implies robust demand, directly contributing to strong Gross Domestic Product ($\text{GDP}$) growth and mitigating the risk of contraction.

**GDP Forecast:** Strong retail figures have contributed to elevated $\text{Q3}$ $\text{2025}$ $\text{GDP}$ estimates, with some models suggesting growth above $\mathbf{4.0\%}$ (Annualized Rate). This level of growth contradicts a recessionary environment.
**Soft $\text{Landing}$ Theory:** The continued strength of the consumer is the primary factor supporting the "soft landing" scenario—where inflation eases without plunging the economy into a recession.

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$\text{The}$ $\mathbf{\text{Remaining}}$ $\text{Recession}$ $\text{Red}$ $\text{Flags}$

While the consumer is spending, key economic indicators outside of retail still point to underlying pressures, keeping the recession probability higher than economists would prefer:

$\text{1}$. $\text{Labor}$ $\text{Market}$ $\text{Softness}$

The **labor market** is the most significant source of current risk. While job numbers remain high, there is evidence of deceleration:

Rising Unemployment: The unemployment rate has risen moderately in the latter half of $\text{2025}$.
Slowing Wage Growth: Wage increases are slowing, which is good for inflation but could reduce consumer purchasing power going into $\text{2026}$.

$\text{2}$. $\text{Household}$ $\text{Debt}$ $\text{and}$ $\text{Bifurcation}$

The retail strength is not evenly distributed. Higher-income consumers continue to spend freely, masking distress among lower-income groups. This is evidenced by:

Credit $\text{Card}$ $\text{Delinquencies}$: Rising delinquency rates on credit cards and auto loans are nearing or exceeding pre-pandemic levels.
Excess $\text{Savings}$ Depletion: Pandemic-era excess savings that supported spending for many months are now mostly depleted for the lowest-income cohorts.

$\text{3}$. $\text{Monetary}$ $\text{Policy}$ $\text{Lag}$

The $\text{Federal Reserve}$'s high interest rates work with a significant time lag (often $\text{12}$-$\text{18}$ months). The full restrictive effect of the $\text{2024}$ rate hikes is still filtering through the economy, particularly in commercial real estate and business investment, which could drag down growth in $\text{2026}$.

$\text{The}$ $\text{Outlook}$ $\text{for}$ $\text{2026}$

The consensus among economists is shifting away from a recession in the near-term ($\text{Q4 2025}$) toward a period of **slower, moderate growth**—a soft landing. However, most still acknowledge a heightened risk of recession ($\text{e.g.}$, $\mathbf{40\%}$ $\text{probability}$) extending into the first half of $\text{2026}$ as monetary policy pressures compound the softening labor market.

Investors should continue to favor defensive positions (like $\text{Consumer}$ $\text{Staples}$ and $\text{Low}$ $\text{Volatility}$ $\text{ETFs}$) while enjoying the near-term tailwind provided by the resilient consumer.

Worried about the 2026 outlook?

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Retail Sales Surprise: Is a US Recession Off the Table