Mark Zandi worries that the labor market is no longer buffered.
Many Americans are “already living on the financial edge,” said the chief economist at Moody’s Analytics. fate. If they start to pull back, that’s “recession fodder.”
The tough assessment comes as hiring stagnates, unemployment rises — especially for the most vulnerable workers — and layoff announcements mount. For Zandi, the next step is already visible: “If we actually see layoffs pick up,” he said. luck, “Then it will definitely be a jobs recession.”
Zandi reached that assessment before the government released its long-delayed JOLTS report on Tuesday, but the official numbers largely confirm the pullback he was tracking through private data. Since the summer, job openings have increased by only a few million and are well below the peak seen during the pandemic frenzy. Layoffs rose slightly, while quit rates fell, a sign that workers are reluctant to leave their current positions. Hiring, meanwhile, has held at 3.2%, a level consistent with employers who aren’t actively downsizing but aren’t expanding their workforce: a “low-hire, low-fire” market.
If cooling appears slow in official data, private indicators tell a sharper story. A November report by ADP found that private employers cut 32,000 jobs, the biggest drop in more than two years. Almost all of those losses came from small businesses, which eliminated 120,000 positions. Large employers have moved in the opposite direction and continue to hire.
For Zandi, the pattern is not random. He sees it as a continuation of the break that occurred earlier in the year, when the administration raised tariffs on reciprocity.
“If you look at when job growth really stopped, it bounced back pretty quickly after Liberation Day,” he said.
Because these firms often lack the financial cushion that large corporations can draw on, payroll becomes the most immediate and often the only mechanism through which they can respond to rising input costs. The result, Zandi argues, is a labor market that appears to be incipiently fractured among the employers most sensitive to policy and price changes. Those breaches then begin to ripple outward, first through hiring freezes and later, if conditions worsen, through widespread layoffs.
So for Zandi, if ADP provides a snapshot of the present, the data from Challenger, Gray and Christmas indicate what may lie ahead. Employers have announced 1.1 million layoffs this year, a number surpassed only in 2020 during the shock of the pandemic and the depths of the Great Recession. These announcements are global, and not all U.S. cuts will materialize, Zandi advised, but he sees their scale as meaningful because they reflect decisions made months before the actual split.
“It suggests there are layoffs coming,” he said. “Looks like they haven’t shown up yet.” The disconnect between rising layoff announcements and historically low unemployment-insurance claims seems increasingly “incongruous” to him, and he suspects that one reason early cuts may be falling on higher-income workers who receive layoffs or wait longer before filing for benefits, obscuring the first phase of the downturn.
Pressure is also building in pockets of the labor market that are usually harbingers of broader tensions. Unemployment has risen for young workers and black workers, both groups that already see a worsening trend in the cycle, Zandi said. Industries that rely heavily on foreign-born labor, including manufacturing, logistics, and agriculture, are grappling with a tighter supply of workers due to deportations, putting additional pressure on smaller firms.
Meanwhile, preliminary research on AI adoption suggests that entry-level hiring in technology and information services is already being reshaped, a development Zandi believes is less important in traditional datasets but is nonetheless beginning to influence the distribution of job opportunities. All of these dynamics contribute to what he sees as a labor market that is weakening in slow but structurally significant ways.
What has kept the labor market from fully contracting is the continued strength of spending among high-income households, while borrowing costs remain high and prices have yet to fully ease. That persistence, despite rising layoff announcements and weaker hiring, reflects how vulnerable affluent consumers remain after a year of strong equity gains fueled by the AI boom. It’s also a clear sign that the “K-shaped economy” has not spread but deepened, with wealthy households buoyed by financial markets while low- and middle-income workers face increasing stress.
Zandi sees this spending as one of the last buffers to prevent the recession from becoming self-reinforcing. Low- and middle-income households remain under strain, however, and he warns that a further erosion in hiring could push them back. Because these households account for the bulk of daily consumption activity, even a modest pullback could turn the current pattern of weak employment into a contraction.
It is precisely in this environment that the Federal Reserve is debating whether to cut interest rates on Monday and Tuesday, an option that reflects the central bank’s growing concern that the labor market could deteriorate even sooner if it is no longer supported by early 2026.
According to the CME FedWatch Fed Fund Futures Index, there is a 90% chance the Fed will cut interest rates for the third time of the year tomorrow. Economists expect the Fed to deliver a kind of hawkish tapering, a move that acknowledges the weakness in hiring but refrains from promising a sustained cut cycle.
Because the tension within the committee is extraordinary. Bank of America economist Aditya Bhave wrote in a research note that Fed Chairman Jerome Powell is facing “the most divided committee in recent memory.” Some officials believe unemployment risks are rising and see a compelling case for more housing. Others are confident that the economy retains enough underlying strength that aggressive easing would be premature and potentially inflationary.
For the Fed, the challenge is to articulate a strategy that acknowledges the implicit weakness and cautions without assuming that the economy has reached a stage that requires an aggressive response.
For Zandi, the concern is more immediate: that the softening now seen in small-business payrolls, layoff announcements, and early demographic stress will eventually coalesce into what he believes are layoffs.
“If we’re not in a jobs recession, we’re close,” Zandi said.
This story was originally featured on Fortune.com
