Mark Zandi, Moody’s Analytics chief economist, joins 'Money Movers' to discuss the recession risks he's seeing in the labor data and economy.

Washington

Moody's Analytics Chief Economist Mark Zandi has expressed significant concern over the risk of recession, pointing to a near standstill in job growth as a key indicator. Zandi explained that while negative job numbers typically signal the onset of a recession, the current situation is complicated by changes in immigration policy, which have led to a shrinking labor force and may mask underlying employment weaknesses. 

He noted that the unemployment rate may not be as reliable an indicator as in the past, due to the decline in the foreign-born labor force following recent policy changes. Zandi also highlighted that consumer spending has stagnated, which, combined with flat labor force growth, could further constrain the economy's potential for growth without triggering inflation.

Recession risks really high, says Moody's Mark Zandi

Joining us today is Moody's Analytics Chief Economist Mark Zandi. Mark, it's great to have you back. Good morning. Good morning. Goldman writes a note today, says that some of these revisions are likely to start triggering some SOM rule recession fears. Are you anywhere near that camp? Yeah, I think recession risks are really high. I think the key here is jobs. I think that's the right place to focus. And of course, you know, with the recent data, we see job growth has come to a virtual standstill. And I don't see any reason why we'll see any pickup here anytime soon. So, you know, if we start getting some negative job numbers, which I think are really very, very possible, that would be a clear indication of recession. The SOM's rule is around the unemployment rate, Carl. You know, if it increases more than about a half a point on a three-month moving average, you know, that historically has signaled recession. Interestingly, that may not be quite as telling this go around because unemployment may not be the indicator to watch because of the weak labor force, given immigration policy and some other things. We may not see unemployment rise to the degree that we have historically, belying the weakness in the economy. But nonetheless, the SOM's rule may actually not be the indicator to watch. But, you know, everything else strongly suggests that the economy is in trouble here. Right. So two questions. Is a negative print part of your base case anytime in the next, by the end of the year? And where do you think break-evens are right now? Yeah, I think break-evens, that's the rate of monthly job growth consistent with stable unemployment. That's probably around 25, 50K, somewhere in there, you know. And that's kind of sort of where it feels like underlying job growth is now abstracting from the vagaries of the data and measurement issues, that kind of thing. But, you know, the probability of a negative print, a negative number is pretty high. I think it's going to be difficult not to see some negative numbers here. And, you know, historically, it's a negative payroll employment. That is when the National Bureau of Economic Research, the folks that date business cycles, you know, date recessions. Once that we go negative that month, that employment goes negative. That's the month when recession begins. Now, of course, you have to see a string of negative numbers. I mean, the recession is a persistent decline in economic activity. So it's not just one or two months, which seems very likely. We'll need something more than that to get a recession. But that number is going to be key to deciding when recession begins here in the next few months. Can you explain just technically speaking how some of the immigration policy may be masking some of the underlying employment weaknesses that you're seeing? What numbers are you looking at to indicate that? And kind of how do you see that filtering through to things like consumer spending and overall economic growth or recession? Yeah, sure. So, you know, obviously, immigrants have been key to the growth in the labor force. I mean, if you go back a year ago, before the more stringent immigration policy went into effect, we were seeing foreign born labor force growing four or five percent. Very strong. Now it's it's actually declining. You know, this stringent immigration policy started to kick in a year ago with Biden's executive order on asylum seekers. And, of course, President Trump has reinforced those of those policies. And so labor force growth has for the for the foreign born has actually started to decline. And the result of that is overall labor force has gone flat. So the size of the labor force today is actually lower than it was at the start of the year. And so because of that, that's keeping the unemployment rate down. So you can't really look at the unemployment rate as a gauge of the strength of the economy. It's really about jobs and job growth slowing. So and by the way, this is really important to longer term growth. Obviously, you know, the potential growth rate of the economy, how fast can the economy grow without generating inflationary pressures is critically dependent on the growth in the labor force. If the labor force is not doesn't grow and then the economy's potential is a lot slower. We're not going to be able to maintain growth rates that are very strong for very long without generating inflationary pressure. So this is very important. The other thing about immigration that's really key here is that it's about demand. You know, one one other indication of the economy's weakness is consumer spending. All in real consumer spending in aggregate has gone nowhere this year. And that may be in part because of the immigrants deporting or pulling back on their spending, given the situation that they're in and that's weighing on consumer spending broadly.

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