The economy is flashing a recession signal that's only been seen 4 times in the last century, veteran economist Steve Hanke says

• A recession looks likely for the US economy by early 2025, according to Steve Hanke.
• That's evident in the contraction in the money supply, a rare signal that's only flashed four time in the last century.

The US economy is poised to enter a recession, as evidenced by a rare economic indicator with a perfect track record of signaling a downturn, according to top economist Steve Hanke.

The Johns Hopkins professor issued a bearish outlook on the US economy in an interview with the wealth advisory firm Wealthion on Tuesday. His forecast is tied to a troubling backdrop for the US on a big-picture level, Hanke said, pointing to the contraction in the money supply, or the total stock of money flowing around the economy.

M2, one type of the money supply, boomed during the pandemic amid loose monetary policy but has fallen over the past few years. The total stock of M2 money supply was around $21 trillion in June — 3% lower than its peak in 2022, when the money supply measured at around $21.7 trillion, according to Federal Reserve data.

An outright contraction in the money supply, which functions as "fuel" for the economy, is unusual, Hanke noted. It's only happened four times since 1913 — and was followed by a recession or an economic depression in each instance.

The M2 money supply began expanding again in June of this year, but changes in the money supply take time to work their way through in the economy, with a lag of one to two years, he added.

"We will enter a recession either late this year or early next year in the United States, and that's why we think the inflation numbers will keep coming down," Hanke predicted.

The outlook for a downturn is also supported by smaller, micro-level indicators in the economy, Hanke said.

The job market, for one, has been steadily weakening, with recession fears recently spiking after the unemployment rate spiked to 4.3% in July — its highest level since the pandemic.

Consumers also appear ground down by inflation and are pulling back on spending. Retail sales have slowed from their rapid clip several years ago, when at-home shopping fueled an American spending boom.

Certain areas of the economy already look to be in a slowdown, some forecasters have noted. Housing activity has been slugged over the past few years as high mortgage rates weigh on the demand for homes. Manufacturing activity, meanwhile, continued to decline in July, with the sector contracting for the 20th month out of the last 21 months, per the Institute for Supply Management.

"If you look at the micro data, it's kind of consistent with this macro, monetary picture that I just gave you, of slowing down going into recession, inflation continuing to come down. That picture is, if you look micro, individual companies or sectors of the economy … those sectors look like a slowdown is in the wind," Hanke said.

Markets remain on high alert for signs of a potential downturn. Investors think there's a 62% chance the Fed will cut rates 100 basis points or more by the end of the year, according to the CME FedWatch tool, a sign that traders anticipate the Fed hastily loosening monetary policy to avoid a recession.