Mark Zandi worries there is no longer a buffer in the labor market.
Moody’s Analytics chief economist says many Americans ‘already live on financial edge’ wealth. If they start to retreat, that’s “a recipe for recession.”
The grim assessment comes as hiring stalls, unemployment rises, especially for the most vulnerable workers, and layoff announcements pile up. For Zandi, the next phase is already visible: “If we do see an increase in layoffs,” he told us wealth, “Then there’s definitely going to be a job recession.”
Zandi made that assessment before the government released its long-delayed JOLTS report on Tuesday, but official data largely confirmed the pullback he tracked through private data. Job openings have increased by only a few hundred thousand since the summer and remain well below peak levels during the pandemic. Layoffs increased slightly while resignation rates fell, suggesting workers are increasingly reluctant to leave their current positions. Meanwhile, hiring remains at 3.2%, a level consistent with employers not actively cutting jobs but also not expanding their workforces: this is a “low hire, low fire” market.
If the official data seems to be cooling slowly, private indicators tell a sharper story. ADP’s November report found that private employers cut 32,000 jobs, the largest decline in more than two years. Almost all of these losses came from small businesses, resulting in 120,000 job losses. Larger employers are moving in the opposite direction and continuing to hire.
For Zandi, the pattern isn’t random. He sees this as a continuation of the disruption seen earlier this year, when the government increased reciprocal tariffs.
“If you look at when job growth really stalled, it resumed shortly after Emancipation Day,” he said.
Because these companies often lack the financial buffers that larger companies can draw on, wages become their most immediate and often only mechanism to cope with rising input costs. The result, Zandi believes, is that the earliest breaks in the labor market are those employers who are most sensitive to policy and price changes. Those rifts then began to spread outward, first with a hiring freeze and then, if things worsened, broader layoffs.
So, for Zandi, if ADP provides a current snapshot, then the data from Challenger, Gray and Christmas hint at what’s likely to happen in the future. Employers have announced 1.1 million job cuts this year, a number surpassed only by the 2020 pandemic shock and the depths of the Great Recession. Zandi said the announcements are global and not all will materialize with U.S. layoffs, but he believes the size of the announcements makes sense because they reflect decisions made months before the actual departures.
“It’s an indication that layoffs are coming,” he said. “They don’t seem to be happening yet.” The disconnect between the growing number of layoff announcements and record-low unemployment insurance filings feels increasingly “dissonant,” and he suspects one reason may be that early layoffs fell on higher-paid workers who received severance pay or waited longer before applying for benefits, masking the first stages of economic weakness.
Certain areas of the labor market are also under pressure, and these are often harbingers of wider stress. Unemployment rates have increased among younger workers and black workers, two groups that tend to worsen earlier in the economic cycle, Zandi said. Industries such as construction, logistics and agriculture that rely heavily on foreign labor are facing tight supply of workers due to deportations, putting additional pressure on small businesses.
At the same time, early research on AI adoption suggests that entry-level hiring in technology and information services is already being reshaped, a development that Zandi believes may be underreported in traditional data sets but is still beginning to impact the distribution of job opportunities. All of these dynamics contribute to what he sees as a slow but structurally significant labor market weakening.
What’s preventing the labor market from slipping into an outright contraction is continued strong spending by upper-income households, even as borrowing costs remain high and prices have yet to fully recede. The persistence, despite rising layoff announcements and weak hiring, reflects how affluent consumers remain in isolation a year after a boom in artificial intelligence fueled strong stock market gains. It is also the clearest sign that the “K-shaped economy” is not dissipating but deepening, with wealthy households getting a boost from financial markets while low- and middle-income workers face growing pressure.
Zandi sees the spending as one of the last buffers against a self-reinforcing slowdown. However, low- and middle-income households are still stretched thin, and he warned that any further erosion in hiring could force them to tighten their belts. Since these households account for a large share of daily consumer activity, even a small pullback could turn current weak hiring patterns into a contraction.
It is in this environment that the Federal Reserve is debating whether to cut interest rates on Monday and Tuesday, a choice that reflects the central bank’s growing concern that without support now, the labor market could deteriorate faster in early 2026.
According to the CME FedWatch Federal Funds Futures Index, there is a 90% chance that the Federal Reserve will implement its third interest rate cut this year tomorrow. Economists expect the Fed to implement some kind of tough rate cuts, a move that acknowledges weak hiring but stops short of committing to a sustained cycle of rate cuts.
That’s because tensions within the committee were unusually palpable. Fed Chairman Jerome Powell faces “the most divisive committee in recent memory,” Bank of America economist Aditya Bhave wrote in a research note. Some officials believe the risk of unemployment is rising and believe further easing measures are necessary. Others remain convinced that the economy still retains sufficient underlying strength that aggressive easing would be premature and could stoke inflation.
The challenge for the Fed is to develop a strategy that acknowledges the clear economic weakness Zandi warned about but does not believe the slowdown has reached a stage that requires an aggressive response.
For Zandi, the concern is more immediate: The weakness now visible in small business employment, layoff announcements and early demographic pressures will eventually coalesce into the layoffs he sees coming.
“If we’re not in a jobs recession, we’re pretty close,” Zandi said.
This story originally appeared on Fortune.com
