Has the U.S. economy already entered a recession? Moody's Chief: Look at this signal from the employment market!

Ask AI · Why Can the Vicious Cycle Index (VCI) Capture Recession Signals More Accurately?

Finance and Securities News (Cailianshe) April 8 News (Edited by Huang Junzhi) Moody’s chief economist Mark Zandi has issued a fresh warning, saying that the recession Wall Street has long feared may already be here.

According to Zandi, he has been watching a particular signal that indicates the U.S. economy may have already fallen into a recession. This signal is called the “Vicious Cycle Index” (VCI, hereinafter referred to as the VCI Index). Zandi says this is an economic indicator he and the Moody’s team created, and it has recently sent a signal that the U.S. economy is heading toward recession.

The calculation of this indicator is broadly based on the Sahm Rule, a well-known recession indicator. Under the Sahm Rule, the U.S. economy enters a recession when the three-month moving average of the unemployment rate rises by 0.5 percentage points or more relative to the low point over the prior 12 months.

The VCI Index is calculated in a similar way, but it reflects changes in the five-year moving average of the labor force participation rate—an “average” that has been declining steadily over the past two years.

Zandi believes that when the economy enters a recessionary period, the VCI may provide “a clearer signal,” because it takes into account those “discouraged job seekers” who have completely given up on looking for work.

He noted that the VCI Index rose to above 1 in January, indicating that the economy entered a recessionary period that month. And the index has remained in the recession zone in February and March as well.

“Therefore, the risk of recession remains uncomfortably high, and the probability of an economic downturn over the coming year is close to a 50-50 coin flip. This is what our leading recession indicator shows,” he wrote in a post.

Before Zandi made these remarks, the job market had just experienced an unexpectedly strong month. However, as companies slow hiring and try to cut costs, concerns this year about a slowdown in employment growth have been intensifying. In March, the U.S. added 178k jobs, far above expectations, but in the prior month of February, jobs unexpectedly fell by 92k.

“Putting aside volatility in the monthly data, since Liberation Day a year ago, there have been very few new jobs. And all of this hasn’t even been affected by the economic shocks brought by the conflict with Iran,” he added when discussing his economic outlook.

Since the Iran war broke out in late February, recession has been the issue most closely watched by forecasters. Zandi has also been warning about the risk of recession.

He previously stressed that investors have ample reasons to be worried—because ever since World War II, with the exception of the brief COVID-19 recession, every recession has been accompanied by a spike in oil prices. Moreover, before the U.S.-Iran war, the U.S. economy had already shown signs of weakness recently.

“A few years ago, after the Federal Reserve tightened monetary policy, many people were confident that a recession was coming, and they even expressed this view publicly, but it turned out they were wrong. However, if oil prices stay elevated for longer (weeks rather than months), a recession will be hard to avoid,” he wrote at the time.

(Finance and Securities News Cailianshe, Huang Junzhi)