The economic downturn Wall Street has been fearing may have already arrived, according to Moody’s top economist.
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Mark Zandi, the chief economist at Moody’s Analytics, said he’s been looking at one signal in particular that suggests the US economy may have already tipped into a recession. It’s called the Vicious Cycle Index — an economic gauge that Zandi said he and his team at Moody’s created, which recently flashed a positive signal for a recession.
The indicator is loosely based on the Sahm Rule, the famed recession indicator that says the US is in a downturn when the three-month average unemployment rate rises half a percentage point over its 12-month low.
The VCI operates similarly but reflects changes in the five-year moving average of the labor force participation rate, which has been declining steadily over the past two years. Reflecting those changes means the indicator likely provides a “clearer signal” when the economy enters a downturn, as it accounts for “discouraged workers” who have given up on finding work altogether, Zandi wrote in a LinkedIn post on Monday.
The VCI rose above 1 in January, suggesting the economy entered a recession that month, Zandi said. The index remained in recession territory through February and March.
“Recession risks thus remain uncomfortably high, with close to even odds of a downturn in the coming year. So says our leading recession indicator,” Zandi wrote in a post on X.
Zandi’s post comes after a surprisingly strong month for the job market, but concerns about weaker job growth have been picking up all year as companies slow hiring and aim to trim costs.
The US added 178,000 jobs in March, well above expectations, but that followed a surprise decline of 92,000 jobs in February.
“Abstracting from the vagaries of the monthly data, few jobs have been added since Liberation Day a year ago, and without healthcare, the economy would be losing jobs. And all of this before the economic fallout from the hostilities with Iran hits,” he added of his economic outlook.
A recession has been top of mind for forecasters since the war in Iran began at the end of February. Zandi — who’s warned about the risks of a recession for months — said he believes oil prices rising past $125 a barrel could trigger a downturn. Brent crude neared that level last month before edging back down. Crude prices hovered near $110 a barrel on Monday.
