Mark Zandi is worried that the labor market no longer has a buffer.
So many Americans are “already living on the financial edge,” said the chief economist for Moody’s Analytics. Fortune. If they start to pull back, that’s “fodder for a recession.”
The stark assessment comes as hiring has stalled, unemployment is rising—especially for the most vulnerable workers—and layoff announcements are on the rise. For Zandi, the next stage is already visible: “If we actually see redundancies go up,” he said Fortune, “Then it would certainly 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 it has been tracking through private data. Since the summer, the opening of jobs has increased by only a few hundred thousand and remained well below the highest levels seen in the frenzy of the pandemic. Redundancies increased slightly, while departure rates decreased, a sign that workers are reluctant to leave their current positions. Hiring, meanwhile, has held at 3.2%, a level consistent with employers not actively downsizing but also no longer expanding their workforces: a “low hire, low fire” market.
If the cooling in the official data appears slow, the private indicators tell a stronger story. ADP’s November report found that private employers cut 32,000 jobs, the steepest decline in more than 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 not random. He sees it as the continuation of a break that was seen earlier in the year, when the administration escalated the reciprocal tariffs.
“If you look at when job growth really stopped, it’s back shortly after Independence 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 through which they can respond to rising input costs. The result, Zandi argues, is a labor market in which the earliest fractures appear among precisely the types of employers most sensitive to policy and price movements. Those violations then begin to trickle out, first through hiring freezes and only later, if conditions worsen, through broader layoffs.
So for Zandi, if ADP offers a picture of the present, the data from Challenger, Gray & Christmas hints at what may lie ahead. Employers announced 1.1 million layoffs this year, a figure surpassed only during the pandemic shock of 2020 and the depth of the Great Recession. These announcements are global, and not all will materialize as reductions in the United States, Zandi advises, but he considers their scale significant because they reflect decisions made months before the actual separations.
“This suggests there are layoffs coming,” he said. “It looks like they haven’t happened yet.” The disconnect between rising layoff announcements and historically low claims for unemployment insurance feels increasingly “incongruous” to him, and he suspects that one reason may be that early cuts are falling on higher-income workers who receive layoffs or wait longer before filing for benefits, obscuring the first phase of the weakness.
Pressure is also building in pockets of the labor market that typically lead to wider stress. Unemployment has increased for young workers and for Black workers, the two groups that tend to see deterioration earlier 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 hiring in technology and information services is already being reshaped, a development that Zandi believes may be understated in traditional data sets 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 sliding into full contraction is the continued strength of spending among higher-income households, even as borrowing costs remain elevated and prices have yet to fully decline. That persistence, despite rising layoff announcements and weak hiring, reflects how isolated wealthier consumers remain after a year of strong gains in equity fueled in part by the AI boom. It is also the clearest sign yet that the “K-shaped economy” has not broken free but deepened, with wealthy families bolstered by financial markets while low- and middle-income workers face growing strain.
Zandi sees this spending as one of the last buffers preventing the slowdown from becoming self-reinforcing. Low- and middle-income households remain stretched, however, and he warns that any further erosion in renting could push them to downsize. Because these homes account for a large share of daily consumer activity, even a modest pull could turn the current weak rental trend into a contraction.
The Federal Reserve is debating an interest rate cut on Monday and Tuesday precisely in 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 supported now.
The chances of the Fed delivering a third interest rate cut next year are 90%, according to the CME FedWatch Fed funds futures index. Economists expect the Fed to deliver a kind of hawkish cut, a move that acknowledges the weakness in hiring but refrains from promising a sustained cycle of cuts.
This is 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 more housing. Others remain convinced that the economy retains enough underlying strength that aggressive tapering would be premature and potentially inflationary.
For the Fed, the challenge is to articulate a strategy that recognizes the unmistakable weakness that Zandi has been warning about without assuming that the slowdown has already reached a stage that requires an aggressive response.
For Zandi, the concern is more immediate: that the softening now visible in small business wages, layoff announcements, and early demographic stress will eventually combine in the layoffs he believes are coming.
“If we’re not in a jobs recession, we’re close,” Zandi said.
This story originally appeared on Fortune.com
