Top economist Mark Zandi warns that many Americans are ‘already living on the financial edge’ in a K-shaped economy.

“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