Mark Zandi thinks the U.S. labor market is losing something that has helped it absorb shocks for the past few years: slack.
Too many households, the Moody’s Analytics chief economist told Fortune, are “already living on the financial edge.” If job insecurity rises and those consumers start spending less, he warns, it becomes “fodder for a recession.”
His view comes as hiring momentum fades, unemployment trends higher—especially among workers who tend to be hit first—and corporate layoff announcements stack up. Zandi says the next step is easy to see from here: if layoffs start to accelerate, the country could slide into what he calls a “jobs recession.”
The “low hire, low fire” phase is taking hold
Zandi formed his outlook before the government’s long-delayed JOLTS release on Tuesday, but he says the official numbers align with what he’s been tracking in private datasets. Job openings, he notes, have only nudged up since summer and remain well below the pandemic-era surge. Layoffs rose slightly. Quit rates fell—often a signal that workers are getting more cautious about jumping to new roles. Hiring has held around 3.2%, consistent with employers who aren’t aggressively cutting headcount but also aren’t expanding much either.
In Zandi’s framing, that is the definition of a “low hire, low fire” market: not a collapse, but a stall.
Private data points to sharper weakness—especially at small firms
While the official picture looks gradual, Zandi argues that private indicators show a more abrupt chill. ADP’s November report found private employers cut 32,000 jobs, the biggest decline in more than two years. The losses were concentrated among small businesses, which shed 120,000 roles. Large employers, by contrast, continued adding workers.
Zandi doesn’t see that split as a coincidence. He believes it reflects the pressure small firms face when costs rise and margins are thin—conditions that can make payroll the fastest lever to pull.
He also links the slowdown to trade policy timing, pointing to the period after reciprocal tariffs were escalated earlier this year.
“If you look at when job growth really came to a standstill, it is back soon after Liberation Day,” he said.
From there, he argues, the weakening often spreads in a familiar pattern: first a pause in hiring, then deeper freezes, and only later broader layoffs if conditions keep deteriorating.
Layoff announcements suggest more pain ahead
To Zandi, the numbers from Challenger, Gray & Christmas look like a warning flare. Employers have announced 1.1 million layoffs this year—second only to 2020 and the worst stretch of the Great Recession. He emphasizes those announcements are global and not all translate into U.S. job cuts, but he still sees the scale as meaningful because such decisions are often made months before separations actually show up in payroll data.
“That would suggest that there are layoffs coming,” he said. “They seemingly have not occurred yet.”
One reason the labor market can still look deceptively steady, he suspects, is that early job losses may be hitting higher-income workers who receive severance or delay filing for unemployment insurance—masking the first phase of weakening.
Stress is rising in groups that often weaken first
Zandi points to increases in unemployment among young workers and Black workers—two groups that frequently show deterioration earlier in the cycle. He also highlights strain in industries that rely heavily on foreign-born labor, such as construction, logistics, and agriculture, where deportations have tightened labor supply and added operational pressure—especially for smaller employers.
He also flags early research suggesting AI adoption is changing entry-level hiring patterns in technology and information services, a shift he thinks may not be fully captured in traditional data but could still be affecting where opportunities exist.
Taken together, Zandi argues, these are not dramatic headline changes—but they can be structurally important ones.
A “K-shaped” consumer cushion may be the last support
What has helped keep the labor market from outright contraction, in Zandi’s view, is resilient spending by higher-income households, even with elevated borrowing costs and prices that have not fully cooled. He attributes some of that resilience to strong equity performance and AI-driven market gains, which he says have kept wealthier consumers insulated.
That, to him, reinforces the idea of a deepening “K-shaped economy”: higher-income households supported by asset markets, while lower- and middle-income workers feel increasing strain.
Zandi views affluent spending as one of the last buffers preventing the slowdown from feeding on itself. But he warns that if hiring weakens further, stretched households could pull back—and because they make up a large share of everyday consumer spending, even a modest retrenchment could turn weak hiring into a broader contraction.
The Fed steps into a pivotal moment
The Federal Reserve now faces this backdrop as it debates an interest-rate cut at meetings on Monday and Tuesday. The market-implied odds of a third cut this year sit around 90%, according to the CME FedWatch Fed funds futures index. Economists expect any move to be “hawkish”—a cut that acknowledges hiring weakness without committing to a rapid series of reductions.
Part of the challenge, as Bank of America economist Aditya Bhave wrote in a note, is internal division. Chair Jerome Powell, Bhave said, is dealing with “the most divided committee in recent memory,” with some officials focused on rising unemployment risks and others worried that premature easing could reignite inflation.
For Zandi, the worry is simpler and more urgent: the cracks he sees in small-business payrolls, layoff announcements, and early demographic stress eventually turning into broader layoffs.
“If we’re not in a jobs recession, we’re close,” Zandi said.
