A new recession red flag: the "Vicious Cycle Index"

The intrigue: Zandi thinks the current unemployment rate isn't telling the full story of the job market.

• A clearer measure should also consider a longer-term view on labor force participation or the share of the population either working or looking for work.
• That rate has been declining faster than the unemployment rate — a sign that people are getting discouraged with the job market, he says.

By the numbers: The unemployment rate in March was 4.3%, just 0.1 percentage point higher than a year ago, according to federal data released last week.

• But the labor force participation rate has fallen more — about a half percentage point from last year.

Zoom in: The drop-off for older Americans was even steeper and is now at its lowest since 2005.

Where it stands: "Just like job growth has gone flat, participation has declined, and so the unemployment rate is understating slack in the labor market," Zandi says. "Workers are feeling discouraged."

• Looking backward, it appears his new index has always correctly signaled a recession in the past, he says.

How it works: The job market weakens, and people worry they're going to be unemployed. They pull back spending. That makes the economy worse, then more consumers pull back — and suddenly you're in a vicious cycle.

Yes, but: Zandi emphasizes that this is new and that he's looking for comments on how it works.

• "I'm still experimenting, and I don't want to put too much weight on it."

Reality check: By most other measures, the U.S. is not in a recession: Consumer spending is holding up, and capital investment is doing well, thanks in large part to the AI data center boom.

• Moody's own model forecasts the odds of a recession at 45%.

The big picture: Recession indicators don't work like they used to, as Axios' Courtenay Brown reported back in the summer of 2024.

• And it's become particularly difficult to understand the economy just by looking at the job market — it has been acting unusually for years following the pandemic.
• The spike in immigration under former President Biden drove a lot of new workers into the labor supply, while the current administration has in turn sharply reversed that dynamic.

Between the lines: Zandi's indicator modifies the Sahm rule, which holds that the economy is likely in a recession when there is a 0.5 percentage point increase in the three-month average unemployment rate over the prior 12 months.

• The rule didn't pan out back in 2024. A surge of new entrants into the job market — immigrants — were pushing up the unemployment rate.
• That wasn't a distress signal. It was an indication that more folks were looking for work.

Zoom out: Zandi's measure looks like a good attempt to deal with that issue, Claudia Sahm, the former Federal Reserve economist who came up with the rule, tells Axios.

• "I understand the logic of it. It is absolutely an Achilles' heel of the Sahm rule," she says.
• "It's another way of highlighting what has been really puzzling about the labor market." There's been very low job creation. Normally that would set off recession alarm bells.
• But "I don't think we're in a recession," she says.

"I'm still playing with Claude. It's so much fun," Zandi says. "If I come up with a better formula, I'll let you know."

The bottom line: Watch out. The economists are vibe coding.