The shocking jobs report on Friday wasn’t the only red flag. Indicators from the past week paint an overall picture of an economy that’s headed for a downturn, according to Moody’s Analytics chief economist Mark Zandi.
After months of looking remarkably resilient in the face of President Donald Trump’s tariffs, the economic outlook has suddenly turned gloomier.
While Trump has claimed without evidence that the jobs data was “rigged” and fired the head of the agency that produces the report, Zandi noted that data often gets big revisions when the economy is at an inflection point, like a recession.
Separate reports also held warning signs. GDP rebounded more robustly than expected in the second quarter, but a metric that strips out the impact of foreign trade and looks instead at final domestic demand indicated slowing.
The personal consumption expenditures report showed core inflation accelerated to 2.8%, further above the Fed’s 2% target, and that consumer spending rose less than expected in June. Fed policymakers have held off on interest rate cuts as they wait to see how much tariffs impact inflation.
Meanwhile, construction spending continued to decline in June amid a sharp drop in single-family homes. And the Institute for Supply Management’s manufacturing activity index for July dipped, indicating the sector contracted at a quicker pace.
There are also no signs of mass layoffs, and the unemployment rate has barely changed, bouncing in a tight range between 4% and 4.2% for more than a year.
But Zandi said the jobless rate is still low only because the size of the labor force has stagnated. That’s as the foreign-born workforce has plunged by 1.2 million in the last six months amid Trump’s immigration crackdown, while the overall labor participation rate has slipped.
As the supply of labor has softened, so has the demand. Zandi pointed to an “economy-wide hiring freeze, particularly for recent graduates.” The upshot is that the so-called neutral level of job gains needed to absorb new workers—and keep the unemployment rate steady—is now much lower.
“It’s no mystery why the economy is struggling; blame increasing U.S. tariffs and highly restrictive immigration policy,” Zandi added. “The tariffs are cutting increasingly deeply into the profits of American companies and the purchasing power of American households. Fewer immigrant workers means a smaller economy.”
Coupled with the lack of any signs that unwanted separations are surging due to immigration policy, this is a strong signal that business demand for labor has cooled, they explained.
“We have consistently emphasized that a slide in labor demand of this magnitude is a recession warning signal,” JPMorgan added. “Firms normally maintain hiring gains through growth downshifts they perceive as transitory. In episodes when labor demand slides with a growth downshift, it is often a precursor to retrenchment.”
