It’s a provocative statement to suggest we’re already in a recession. I wouldn’t go that far for the whole economy, but for large swaths of the US, the recession is already here.

On a day when the question is how much the Federal Reserve is going to cut interest rates, it makes sense to understand why there’s any urgency to cut at all. And it starts here:

• Rising underemployment and youth and Black unemployment are just three data points that suggest many households are already experiencing significant economic challenges.
• Typically, these are leading indicators of recessionary trends. And the soft data confirm that consumers expect a recession in the next 12 months.
• Why is the economy holding up then? Wealthy consumers who represent the top 10% of income distribution now account for nearly half of total spending. They’re doing well.
• In the end, large federal budget deficits and AI spending should be enough to keep the broad US economy out of recession. As long as that’s the case, the bull market should remain intact, even though there will still be significant pockets of economic distress. 

Leading indicators of recession look ominous

It’s logical to wonder why, if core annual inflation is still around 3%, the Nasdaq 100 Index just hit a record high and leaders in the AI industry are talking about a bubble,  the Fed is lowering rates in the first place.

Here’s a chart I used last week that explains why we’re likely getting cuts.

The record number of jobs subtracted from employment in recent downward revisions shows the labor-market expansion in 2024 was weaker than we thought heading into this year’s immigration slowdown. That suggests the rate hikes in 2022 and 2023 acted with a lag to slow the economy. It aligns with the steady rise in underemployment since 2023. And it signals that, if the Fed doesn’t ease now, the lag before its policy takes effect could tip the US into recession.

One way to think about the post-rate-hike economy is as a bifurcation between haves and have-nots as rising underemployment, sticky inflation and higher interest rates hit lower-income households more. Small businesses have also suffered disproportionately from high interest rates and tariffs. High-income households are basically keeping the economy afloat — helped in no small part by elevated home prices, the AI boom, steady interest income and the surge in stock prices.

However, looking at Black unemployment, which typically leads the rise in overall unemployment, you could argue that large parts of the US economy are already in a recession. 

The tick-up in 2025 in Black unemployment is worrying because it’s happening right now.

Mark Zandi, chief economist for Moody’s Analytics, has shown that the US economy is increasingly dependent on spending from the upper decile of households. And he’s saying now that there’s a 50% chance of a recession in the next 12 months — in part because of strains on lower-income households.

And that echoes what consumers are actually saying. The Conference Board has found that there are nearly as many consumers — more than 70% — saying there’s a likelihood of recession in the next 12 months as there were at the peak of recession angst in 2023.

Source: The Conference Board

By the numbers

Stocks can still rally though

What do investors do with this information?

On the one hand, you see veteran investors like Oaktree Capital Management’s co-founder, Howard Marks, saying we’re in the “early days’’ of a potential stock -market bubble. Continued high investment in artificial intelligence is underpinning that view, supporting stock prices.

On the other hand, along with the climb in Black unemployment and underemployment, other leading indicators of recession are sounding the alarm with youth unemployment rising too — particularly for young men.

It speaks to an underlying US labor-market fragility which the Fed is now about to address with rate cuts.

My view is that as long as deficits stay elevated —  as they have been — we should expect slowing growth, more than recession. What’s more, with the capital investment boom in AI now joined by an incipient wave of initial public offerings, all indications are the bull market has some ways to go.

In fact, because of the cyclical bear market ushered in by rate hikes in 2022 and 2023, the trendline from 2020 lows for the S&P 500 doesn’t look too bad.

Still, there’s reason to worry that the support for the stock market could unravel as economic distress builds.

Average initial jobless claims have hit the threshold I have given at which bad economic news stops being a positive for stocks via expectations for rate cuts, and turns into a negative via lower earnings growth or even recession.

A lot of the rise last week was driven by temporary factors. But the trend and the levels are hard to ignore, meaning bullish investors need to watch this initial claims data set as an early warning sign of a possible reversal.

Things on my radar

• More evidence of the AI boom came via Oracle last week. It made founder Larry Ellison briefly the world’s richest person.
• But Tesla made a comeback, boosted by Elon Musk’s stock buys.
• Overall, big tech valuations continue to rise. Alphabet hit $3 trillion in market capitalization recently.
• As for the broader economy, mortgage rates now at the lowest in 11 months can help.

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