Warning Signs Of A Looming Recession, According To An Economist

Recessions rarely come out of nowhere. There are typically indications that appear well beforehand, signaling that an economic downturn may be ahead. Red flags of a recession can include everything from shifts in the yield curve to reduced resignation rates. According to Mark Zandi, chief economist at Moody's Analytics, there are currently three main factors causing him concern in this regard: the increased financial strain among low- and moderate-income households, an expected rise in layoffs, and weakening hiring trends. 

Many households are "already living on the financial edge," Zandi told Fortune, and cutting back any more could increase the risk of a recession. So far, the risk has been tempered by continued spending among wealthier households, which has helped provide a buffer for the overall economy. This pattern — in which higher-income households continue to thrive while the financial conditions for lower-income communities deteriorate due to a tough job market and inflation — is known as a K-shaped economy and has been increasingly cited as a sign of a widespread economic downturn. During an interview for Yahoo Finance's annual Invest conference, Allianz's chief economic adviser, Mohamed El-Erian observed that, while this may only be an immediate issue for lower-income individuals, it might not stay that way. He noted, "If lower-income households stop spending, not because they don't want to spend, but they're not able to spend, that will contaminate upwards for the economy as a whole."

A gradual increase in layoffs is also giving Zandi cause for concern about an impending recession. So far, the unemployment rate has remained relatively low, though it has been inching higher. The Bureau of Labor Statistics (BLS) reports it hit 4.4% as of September 2025, up from 3.4% in April of 2023. Other data, however, points to additional layoffs on the horizon — and that could spell trouble for the economy. "If we actually do see layoffs pick up, then it certainly would be a jobs recession," Zandi told Fortune. 

Between January and November 2025, there were more than 1.1 million announced job cuts, according to recruitment firm Challenger, Gray & Christmas. That's an increase of more than 50% over the previous year and the highest level since 2020. Of course, 2020 marked the start of the COVID-19 pandemic, which disrupted much more than just the economy. Barring that extremely volatile era, 2009 was the last time layoff announcements reached a similar level — about 1.2 million — and that did end up leading to a recession. Though the data is pointing to announced layoffs, which could be a different figure from ones that were actually enacted, Zandi said it "would suggest that there are layoffs coming." This prospect is fueling concern among Americans wondering what they should do if they get fired – especially if they're already struggling financially.

There are certain segments of the job market where layoffs have been concentrated. Zandi believes these areas could be early signals of a weakening job market. One notable area is among small businesses with less than 50 employees. According to ADP's November 2025 National Employment Report, businesses this small lost 120,000 jobs in November. This is compared to medium and large companies, which grew their workforces by 51,000 and 39,000, respectively, in the same month. "While November's slowdown was broad-based, it was led by a pullback among small businesses," said ADP Chief Economist Dr. Nela Richardson.

Many small businesses have had to weather Trump's tariffs, many of which were put in place on April 2, 2025 — a day now known as "Liberation Day." Zandi believes this has been a major headwind for these companies. "If you look at when job growth really came to a standstill, it is back soon after Liberation Day," he told Fortune. Small businesses are more vulnerable to tariffs since they don't have the expendable income that might allow larger organizations to weather higher costs and supply chain issues. According to research from the American Action Forum, small businesses in the U.S. are expected to get hit with roughly $85 billion a year in direct costs from the tariffs, in addition to billions of dollars in indirect costs. It's inevitable that some companies just won't be able to keep up with those added expenses.

Job cuts were also heavily concentrated in specific industries, which Zandi told Fortune could be an early indicator of what's to come in the broader labor market. Private employers shed 32,000 jobs in November, with the most coming from professional and business services, information, and manufacturing, per ADP. In terms of announced layoffs, Challenger, Gray & Christmas reports tech jobs have experienced the highest rate of unemployment among private companies, with more than 150,000 jobs lost between January and November 2025. This figure is 17% higher than the same period last year. 

Zandi also sees the proliferation of AI starting to take a toll on jobs, particularly for entry-level hires in tech and IT. A recent paper on AI's effects on the employment market published by Stanford University found that employment for people aged 22 to 25 working in industries exposed to AI — such as software developers and customer service representatives — dropped 16% since AI has been broadly adopted. Since 2023, when AI started sparking widespread layoffs, it has increasingly been used to justify cuts. In fact, Challenger, Gray, & Christmas reports that, from January through November, AI was behind nearly 55,000 planned cuts. Tech companies such as Google, Microsoft, and IBM have already been replacing employees with AI, and this is a trend that is expected to continue.

In terms of demographics, teenaged and black workers experienced the highest jobless rates in November 2025. Speaking with Yahoo, Zandi pointed to this fact as a sign of further softening in the labor market, as these groups typically deal with the stresses of thinning employment opportunities earlier than others. Per BLS, the jobless rate for teenage workers was 16.3%, while black workers experienced a rate of 8.3%.

In addition to layoffs, the outlook for new hires is also pretty grim. Per Challenger, Gray & Christmas, during the period between January and November, the number of planned hires announced by U.S. companies was down 35% from the same period last year — bringing that figure down to the lowest it's been in 15 years. "Hiring has been choppy of late as employers weather cautious consumers and an uncertain macroeconomic environment," Richardson said for ADP.  If hiring gets worse, Zandi believes it could have significant repercussions — especially as the beginning of a new year tends to be the best time of year to look for a new job.