ICYMI: Zandi warns the labour market is weaker than payrolls suggest, with his VCI indicator signalling recession risks may already be materialising.
Summary:
- Mark Zandi warns March payrolls overstate labour market strength
- Job growth weak when stripping out distortions and healthcare hiring
- Recession risks remain elevated, near “coin flip” odds
- New “Vicious Cycle Index (VCI)” suggests more labour slack than headline data
- VCI already triggered recession signal in January
- Indicator implies economy may already be in downturn, despite resilient surface data
Mark Zandi (Chief Economist at Moody’s) cautions against reading too much into the strong March payrolls report, arguing that underlying labour market conditions are significantly weaker than headline figures suggest. The latest employment gain follows a distorted February decline caused by severe weather and strike activity, meaning the recent rebound largely reflects volatility rather than genuine strength.
Looking through the noise, Zandi’s assessment is that job growth has been minimal over the past year. In fact, excluding healthcare—a sector that continues to add jobs steadily—the broader economy would likely be experiencing outright job losses. This points to a labour market that is far more fragile than commonly perceived.
Crucially, this weakness comes before the full economic impact of the Iran conflict has been felt. Rising energy costs and heightened uncertainty are expected to add further strain, reinforcing downside risks.
Zandi places recession probabilities at close to 50%, supported by both traditional models and newer indicators. Among these is a newly developed measure—the Vicious Cycle Index (VCI)—which he argues provides a more accurate read on labour market conditions in the current environment.
The key takeaway from his analysis is that the labour market may already be deteriorating beneath the surface, with official data lagging reality. As such, the March payrolls strength should be heavily discounted when assessing the true trajectory of the economy.
Simplified explanation: VCI and what it means
At its core, the Vicious Cycle Index (VCI) is an upgraded version of a well-known recession signal (the Sahm Rule), designed to better reflect today’s labour market dynamics.
Step-by-step intuition:
- The Sahm Rule says a recession is underway if unemployment rises quickly (by ~0.5 percentage points).
- The idea: rising unemployment → less spending → more layoffs → recession spiral.
The problem today:
- Labour force participation (people choosing to work) has been shifting a lot.
- When fewer people are in the workforce, the unemployment rate can look artificially low—even if conditions are weakening.
What the VCI does differently:
- It adjusts for this by using a longer-term (5-year) average participation rate instead of the current one.
- This helps capture “hidden weakness”, people dropping out of the workforce rather than showing up as unemployed.
Why it matters now:
- The VCI is currently higher than the official unemployment rate suggests (~5%)
- It implies more slack in the labour market than headline data shows
- It has already triggered a recession signal based on historical thresholds
Key implication:
- Even if unemployment looks stable, the labour market may already be weakening, just in a less visible way.
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