US economy on the verge of a recession says Moody's Chief Economist - Fed can't rescue

Mark Zandi, Chief Economist at Moody’s Analytics, warns the U.S. economy is on the verge of recession, citing recent disappointing data including flat consumer spending, contracting construction and manufacturing, and signs of weakening employment. Zandi attributes this economic drag to policy choices in Washington, specifically escalating tariffs and restrictive immigration, which are eroding corporate profits, household purchasing power, and limiting growth capacity, intensifying market concerns about a policy-induced downturn.

Analysis

Mark Zandi, Chief Economist at Moody’s Analytics, has signaled that the U.S. economy is on the verge of recession, citing a confluence of negative economic indicators. The warning is substantiated by flatlined consumer spending, a contraction in the construction and manufacturing sectors, and an employment market that is poised to weaken. Zandi highlights that the currently low unemployment rate is a deceptive metric, masked by stalled labor force growth resulting from a smaller foreign-born workforce and declining participation. More immediate signs of stress in the job market include a broad-based hiring freeze and a reduction in hours worked. The analysis directly attributes the economic drag to U.S. policy choices, specifically escalating tariffs that are eroding corporate profits and household purchasing power, and restrictive immigration policies that limit the economy's growth capacity. This assessment from a prominent economist amplifies existing market concerns about a potential policy-induced downturn.

Key Decisions for Investors

• Given the elevated recession risk and pressure on corporate profits from tariffs, investors should review portfolio exposure to cyclical sectors like manufacturing and construction and consider rotating towards more defensive assets.
• Closely monitor forward-looking labor market indicators beyond the headline unemployment rate, such as hours worked and labor force participation, for early signs of economic deterioration.
• Since the economic slowdown is attributed to specific government policies, investors must track developments in U.S. trade and immigration policy, as any changes could significantly impact the market outlook.
• Be cautious of the stagflationary risk implied by slowing growth and rising inflation, which could limit the Federal Reserve's ability to support the economy and prolong market volatility.