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By Hugh Cameron
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Recent labor market data suggests that the U.S. may already be entering the recession that some economists have for months been anticipating, according to the global financial services firm and credit ratings agency Moody’s.
The company devised a new model to determine whether and when the country is in the midst of a downturn. Incorporating unemployment and labor market participation rates, Moody's Chief Economist Mark Zandi said this week that the “Vicious Cycle Index,” or VCI, has now flashed red through the first three months of 2026.
“Recession risks thus remain uncomfortably high, with close to even odds of a downturn in the coming year,” Zandi wrote on X, citing the company's existing machine-learning model as well as the latest VCI calculations.
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Why It Matters
A number of economists have warned that fallout from the Iran war—primarily the ongoing increase in global oil prices—could upset an already-fragile economic picture in the U.S. and push the country closer to a recession. Some financial institutions have increased their odds of a downturn occurring in the near future, following the February 28 strikes by the U.S. and Israel that triggered the conflict, while other experts have said that months of meager employment growth means that the country may already be caught in a "jobs recession."
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What To Know
According to the latest employment report from the Bureau of Labor Statistics (BLS), the U.S. economy added 178,000 jobs in March, up from a loss of 133,000 in February and nearly three times the amount analysts had forecast. The unemployment rate edged down to 4.3 percent from 4.4 percent the previous month, but March’s unexpected gains failed to offset months of what the Federal Reserve has diagnosed as “near-zero” employment growth.
And Zandi said that “abstracting from the vagaries of the monthly data, few jobs have been added since Liberation Day a year ago, and without health care, the economy would be losing jobs.”
"And all of this before the economic fallout from the hostilities with Iran hits," he added.
In a blog post published Monday, Zandi highlighted the “Sahm Rule” as an indicator that had in recent times been used to signal imminent or onset recessions. This heuristic—employed by the Federal Reserve—charts the early stage of downturns by whether the unemployment rate’s three-month moving average has risen 0.5 percent relative to the its lowest level over the previous 12 months.
However, Moody’s new VCI indicator also incorporates the five-year moving average of the labor force participation rate to avoid false positives in cases where surging immigration has led to an increase in overall unemployment despite otherwise solid economic growth, and to provide a “clearer signal of recession risk when participation is shifting.”
March’s employment report revealed that the participation rate fell to 61.9 percent from 62 percent in February, and now sits at its lowest level since October 2021. As a result, Zandi said the VCI edged above one point in January, indicating that the economy was in recession territory, and remained above the threshold in February and March.
What People Are Saying
Moody's Analytics Chief Economist Mark Zandi, on LinkedIn: “The VCI was triggered this past January. It could still prove wrong. These are highly unusual times and we have yet to see consumers pull back significantly or businesses begin widespread layoffs. Nonetheless, at a minimum, the VCI is another good reason to heavily downweight the significance of the March payroll employment gain.”
Economist Claudia Sahm, creator of the Sahm Rule recession indicator, in a recent article for Bloomberg: “The war—particularly a prolonged and effective closure of the Strait of Hormuz—is likely to create unexpected costs for a variety of U.S. businesses… And if businesses’ cost-cutting leads to a pickup in layoffs, that could upend the curious balance in the labor market. With the hiring rate already at very low levels, a rise in layoffs could lead to a rapid increase in the unemployment rate.”
What Happens Next
Zandi and Sahm noted that relatively modest layoff levels were preventing weak employment growth from translating into a more significant threat to the economy.
“The labor market’s ‘curious kind of balance’ has defied the usual patterns,” Sahm wrote last week. “Over the last half decade, it has been resilient when confronted with a whole host of shocks. But with the war in Iran, the labor market may face its most destabilizing test yet.”
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