Mark Zandi is concerned that the labor market is running out of buffers.
So many Americans are “already living on the financial edge,” said the chief economist at Moody’s Analytics. wealth. If they start to pull back, that’s “fodder for a recession.”
The harsh assessment comes as hiring has stagnated, unemployment is rising — especially for the most vulnerable workers — and layoff announcements are piling up. For Zandi, the next stage is already visible: “If we see layoffs going up,” he said. wealth, “Then there would definitely be a recession in jobs.”
Zandi arrived at that assessment before the government released the lengthy JOLTS report on Tuesday, but the official figures largely confirm the retreat he tracked through private data. Since the summer, job openings have increased by only a few hundred thousand and remain well below the highs seen during the pandemic frenzy. Layoffs rose slightly, while attrition rates fell, a sign that workers are increasingly hesitant to leave their current positions. Meanwhile, hiring held at 3.2 percent, a level consistent with employers not actively cutting staff but also not expanding their workforce either: a “low hiring, low fire” market.
If the cooling in official data appears slow, private indicators tell a clearer story. November’s ADP report found that private employers cut 32,000 jobs, the biggest drop in two years. Almost all of those losses came from small businesses, which eliminated 120,000 positions. Larger employers moved in the opposite direction and continued to hire.
For Zandi, the pattern is no accident. He sees this as a continuation of a pause that occurred earlier in the year, when the administration escalated reciprocal tariffs.
“If you look at when job growth really stopped, it goes back to shortly after Liberation Day,” he said.
Because these firms often lack the financial cushions that larger corporations can draw on, wages become the most immediate and often the only mechanism by which they can respond to rising input costs. The result, Zandi argues, is a labor market in which the earliest fractures occur precisely among the types of employers most sensitive to policy and price changes. These fractures then begin to spread outward, first through hiring freezes and only later, if conditions worsen, through broader layoffs.
So for Zandi, if ADP offers a snapshot of the present, the data from Challenger, Gray & Christmas suggests what could be next. Employers have announced 1.1 million layoffs this year, a figure surpassed only during the pandemic shock of 2020 and the depths of the Great Recession. These announcements are global and not all will materialize as U.S. cuts, Zandi advised, but he sees their scope as significant because they reflect decisions made months before the actual breakups.
“That would suggest layoffs are coming,” he said. “Looks like they haven’t happened yet.” The disconnect between rising layoff announcements and historically low jobless claims seems increasingly “incongruous” to him, and he suspects that one reason may be that early cuts are falling on higher-income workers who receive benefits or wait longer before claiming benefits, obscuring the first phase of the slack.
Pressure is also mounting in pockets of the labor market that are usually harbingers of wider stress. Unemployment rose for young workers and workers of color, both groups that tend to see deterioration early in the cycle, Zandi said. Industries that rely heavily on foreign-born labor — including construction, logistics and agriculture — are facing a tighter supply of workers due to deportations, putting additional pressure on small firms.
Meanwhile, early research on AI adoption suggests that entry-level employment in technology and information services is already being reshaped, a development that Zandi believes may be underestimated in traditional data sets, but which is nevertheless 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 falling into an outright contraction is the continued strength of spending among higher-income households, even as borrowing costs remain high and prices have yet to fully fall. That persistence, despite a rise in layoff announcements and a slowdown in hiring, reflects how isolated wealthier consumers remain after a year of strong capital gains, fueled in part by the AI boom. It is also the clearest sign yet that the “K-shaped economy” has not dissipated but deepened, with wealthy households supported by financial markets while low- and middle-income workers face increasing strain.
Zandi sees these expenses as one of the last buffers that keep the slowdown from becoming self-reinforcing. However, low- and middle-income households remain stretched thin, and he warns that any further erosion of employment could push them to retreat. Because these households account for a large portion of everyday consumer activity, even a modest pullback could turn the current pattern of weak employment into a contraction.
The Federal Reserve is debating an interest rate cut on Monday and Tuesday in precisely this environment, a choice that reflects the central bank’s growing concern that the labor market could deteriorate faster in early 2026 if it is not sustained now.
The odds of the Fed making its third rate cut of the year tomorrow are 90%, according to the CME FedWatch Fed funds futures index. Economists expect the Fed to offer some sort of tapering, a move that acknowledges weakness in hiring but refrains from promising a sustained tapering cycle.
That’s because the tension within the committee is unusually pronounced. 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 additional accommodation. Others remain convinced 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 recognizes the unmistakable slack that Zandi warned about, without assuming that the slowdown has already reached a stage that requires an aggressive response.
For Zandi, the worry is more immediate: That the softening now visible in small business payrolls, layoff announcements and early demographic stress will eventually add up in the layoffs he believes are coming.
“If we’re not in a jobs recession, we’re close,” Zandi said.
This story was originally featured on Fortune.com
