A recession already underway, or just another warning sign?
The debate over whether the U.S. economy is heading toward a downturn may be lagging reality. According to economist Mark Zandi, the VCI recession signal suggests the country could already be in a recession, even as headline data appears mixed.
Zandi, chief economist at Moody’s Analytics, points to the Vicious Cycle Index, or VCI, a proprietary indicator designed to detect turning points in the labor market. The VCI recession signal has historically aligned with every U.S. recession since World War II, without issuing false positives, making its latest reading difficult for economists to ignore.
What makes the VCI different from traditional indicators?
The VCI builds on the widely followed Sahm Rule but incorporates a deeper adjustment for labor force participation. While the Sahm Rule focuses on changes in unemployment rates, the VCI accounts for workers leaving the labor force, a dynamic that can mask underlying economic weakness.
Specifically, the index tracks how quickly unemployment rises relative to a five year average of labor participation. It triggers when the three month average unemployment rate increases by more than one percentage point over the past year.
Zandi notes that this threshold has already been breached. The index rose above that level earlier this year and has remained elevated for several months, reinforcing the VCI recession signal as a persistent warning rather than a temporary fluctuation.
“The measure has consistently identified recessions without false alarms,” Zandi stated in a recent public analysis, adding that official confirmation from economic authorities often lags real time conditions.
Strong job growth, but is it misleading?
Recent labor data has complicated the narrative. The U.S. added 178,000 jobs in March, exceeding expectations and suggesting resilience in hiring. However, Zandi argues that this figure does not reflect the full picture.
The prior month saw a sharp decline in employment, influenced by severe winter conditions and labor disruptions. When viewed together, the two months present a more uneven trajectory than the March headline suggests.
More importantly, Zandi highlights that job growth has been narrowly concentrated. Without gains in sectors such as health care, overall employment trends would appear significantly weaker. This reinforces the VCI recession signal, which captures broader labor market slack that traditional payroll figures may overlook.
A decline in labor force participation has also contributed to a lower unemployment rate, a dynamic some economists interpret as a sign of hidden weakness rather than strength. When workers stop actively seeking jobs, they are no longer counted as unemployed, which can artificially improve headline figures.
Rising risks, but no consensus yet
The VCI reading comes amid a growing list of economic headwinds. An oil shock linked to geopolitical tensions has added pressure to prices and business costs. Consumer confidence remains subdued, and concerns about stagflation, a combination of weak growth and persistent inflation, have resurfaced in economic discussions.
Even so, not all policymakers share the same level of concern. Federal Reserve Chair Jerome Powell recently emphasized the economy’s resilience, noting its ability to withstand multiple shocks in recent years.
Forecasts from major institutions reflect this uncertainty. Moody’s Analytics estimates nearly a 50 percent probability of a recession within the next year, while other firms place the odds between 30 percent and 40 percent.
Still, the VCI recession signal introduces a different perspective. Rather than predicting a future downturn, it suggests that economic contraction may already be underway, though not yet formally recognized.
A reliable signal, but not infallible
Despite its historical accuracy, the VCI is not immune to error. Its foundation, the Sahm Rule, issued a recession warning in 2024 that ultimately did not materialize, as monetary easing helped stabilize the economy.
Zandi acknowledges that today’s economic environment is unusual, and that even a strong indicator like the VCI could misread conditions shaped by post pandemic labor shifts and policy interventions.
However, he argues that the index should at minimum temper optimism סביב recent data releases. If the VCI recession signal is correct, the apparent strength in employment figures may reflect lagging indicators rather than current reality.
For investors, business leaders, and policymakers, the implication is clear. The question may no longer be whether a recession is coming, but whether it has already begun.
