Red Flags Emerge: Is the US Economy on the Brink of Recession?

Last Friday's shocking jobs report wasn't the only red flag. According to Moody's Analytics chief economist Mark Zandi, the array of indicators released last week collectively signal that the U.S. economy is headed toward a recession.

After seemingly weathering the storm of Trump's tariff pressures and exhibiting significant resilience for months, the U.S. economic outlook has suddenly turned markedly bleak.

"The economy is on the knife's edge of recession. That's the clear message from the deluge of economic data this past week," Zandi wrote in a series of posts on X (formerly Twitter) last Sunday. "Consumer spending is stalling, construction and manufacturing are contracting, and job growth is about to slide. And with inflation on the rise, the Fed will have a tough time coming to the rescue."

Job Growth Slowdown and Negative Revisions

July saw the addition of just 73,000 jobs, far below the expected figure of around 110,000. Meanwhile, May's data was revised down from 144,000 to 19,000, and June's data was significantly revised down from 147,000 to just 14,000. This means the average number of new jobs added over the past three months is a mere 35,000.

Despite Trump's unsubstantiated claims that the jobs data was "manipulated" and his firing of the head of the agency that compiles the report, Zandi points out that data often undergoes significant revisions when the economy is at an inflection point, such as a recession.

Other Warning Signs

Other reports also contained warning signs. Second-quarter GDP rebounded more than expected, but a measure that strips out the impact of foreign trade and focuses on domestic final demand showed growth slowing.

The personal consumption expenditures report showed core inflation accelerating to 2.8%, further above the Federal Reserve's 2% target. Additionally, consumer spending growth in June was weaker than anticipated. Fed policymakers remain in a holding pattern regarding interest rate cuts, waiting to see the impact of tariffs on inflation.

Meanwhile, construction spending continued to decline in June, with a sharp drop in spending on new single-family homes. The ISM manufacturing index fell in July, indicating that the sector is contracting at a faster pace.

Currently, the Atlanta Fed's GDP tracking model shows the economy continuing to grow, but it expects growth in the third quarter to slow from 3% in the second quarter to 2.1%.

Impact of Immigration and Tariff Policies

While there are no signs of mass layoffs by companies, and the unemployment rate remains virtually unchanged, hovering in a narrow range of 4% to 4.2% for over a year, Zandi says the unemployment rate is only staying low because the labor force size is stagnant. This is due to a decline of 1.2 million foreign-born workers over the past six months under Trump's immigration restriction policies, as well as an overall drop in labor force participation.

As the labor supply dwindles, demand is also cooling. Zandi notes that "the entire economy is in a hiring freeze, especially for recent college graduates." The result is that the so-called "neutral new jobs" needed to absorb new workers and keep the unemployment rate stable is now much lower.

"The reason the economy is struggling is no mystery, and it is due to rising U.S. tariffs and highly restrictive immigration policies," Zandi added. "Tariffs are increasingly eroding U.S. corporate profits and household purchasing power. And a smaller immigrant workforce means a smaller economy."

Warnings from JP Morgan

Last Friday, economists at JP Morgan also issued a warning about a potential recession. They noted that the jobs data shows the private sector added an average of only 52,000 jobs per month over the past three months, and industries other than healthcare and education are in stagnation.

They explained that, coupled with no signs of a surge in involuntary separations due to immigration policies, this strongly suggests that business demand for labor has weakened.

"We have been emphasizing that this degree of labor demand deceleration is a recession warning sign," JP Morgan added. "Firms typically maintain hiring growth through what they believe to be temporary growth slowdowns. When labor demand falls with growth, it is often a precursor to layoffs."