The recession Wall Street has been bracing for may already be here.
Mark Zandi, chief economist at Moody’s Analytics, says a proprietary gauge his team developed, the Vicious Cycle Index, has been flashing a clear recession signal since January and remained in recession territory through March.
The indicator, which Zandi described in a LinkedIn post on Monday, is designed to detect the self-reinforcing downturns that traditional measures sometimes miss.
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The VCI is loosely modeled on the well-known Sahm Rule, which flags a recession when the three-month average unemployment rate rises half a percentage point above its 12-month low. But Zandi’s version improves on that by tracking changes in the five-year moving average of the labor force participation rate, which has been declining steadily for the past two years.
By explicitly accounting for “discouraged workers” who have stopped looking for jobs altogether, the VCI aims to deliver a “clearer signal” when the economy truly tips into contraction.
“The VCI rose above 1 in January, suggesting the economy entered a recession that month,” Zandi wrote. “The index remained in recession territory through February and March.”
He reinforced the warning on X, stating: “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’s assessment comes after a volatile jobs report that, on the surface, looked solid. The U.S. added 178,000 jobs in March, beating expectations, but that followed a shocking decline of 92,000 jobs in February. Looking past the monthly swings, Zandi noted that job growth has been essentially flat for the past year.
“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,” he wrote. “And all of this before the economic fallout from the hostilities with Iran hits.”
The Iran war, now in its sixth week, has already shut down much of the Strait of Hormuz and sent oil prices soaring. Brent crude briefly flirted with $125 a barrel last month and was hovering near $110 on Monday. Zandi has long warned that if oil climbs above $125 and stays there, a recession becomes highly probable.
The longer the energy shock persists, the greater the risk that higher fuel and transportation costs will bleed into consumer spending, business investment, and broader inflation.
The timing is particularly ominous as the labor market was already showing signs of fatigue, slower hiring, rising layoffs in some sectors, and a stubborn drop in labor force participation — before the Middle East conflict added a powerful external blow.
Zandi’s Vicious Cycle Index is picking up exactly that kind of self-reinforcing weakness: falling participation feeds weaker demand, which leads to slower hiring, which discourages even more people from looking for work.
While only the National Bureau of Economic Research makes the official call on recessions, Zandi’s indicator has a strong track record of spotting turning points early. His warning adds weight to a growing sense on Wall Street that the soft landing many forecasters had hoped for is slipping away. With energy prices elevated, consumer confidence fragile, and businesses already trimming costs and slowing hiring, the economy appears to have far less cushion than it did even a few months ago.
Zandi stopped short of declaring a recession with absolute certainty — he knows the data can still shift. But his message is unmistakable: the warning lights are not just blinking; they have turned red. And the full economic impact of the Iran war has not yet been felt.
The coming months will tell whether the U.S. has already tipped into recession or is merely teetering on the edge.