Moody’s chief economist predicts US recession amid American pessimism

Americans are increasingly gloomy about the economy, and a new warning from Moody’s chief economist may deepen that pessimism. A Wall Street Journal-NORC poll found nearly 70% of Americans believe the “American dream” is fading or was never real – the bleakest outlook in 15 years of polling. Now, Mark Zandi, Moody’s chief economist who famously predicted the 2008 crash, says the U.S. economy could tip into recession by the end of the year.

‘Red indicators’

Zandi told Newsweek that “red indicators” are showing up in housing, employment and the costs of everyday items.

“I don’t think the economy is in a recession, at least not at this point,” Zandi said,” but it feels like it’s on the brink, it’s on the precipice of this recession.”

He pointed to stalled job growth as a flashing alarm, noting payroll reports show a “virtual standstill.” The true signal, he said, will be layoffs.

“As soon as you see negative employment, payroll employment decline in a month, that’s when alarm bells should start going off,” he said. “And I would anticipate that that’s going to happen, and that’s going to happen soon.”

Inflation pressures

Zandi expects annual inflation to climb from 2.7% today to nearly 4% by late 2026, warning, “Prices are already rising, you can see it in data, but it’s going to rise to a degree that it will be impossible for people to ignore.”

Despite the risks, Zandi said the economy’s foundation remains strong. He singled out California and New York, along with growth sectors such as artificial intelligence, as critical to avoiding a downturn.

“I think what happens with California and New York may decide what happens to the nation. I mean, if California and New York weaken and start to contract, the national economy is going to go into recession.”

Consumer confidence gap

The pessimism contrasts with relatively stable economic indicators. Inflation and unemployment remain low by historic standards. Still, just 17% of people surveyed in the Journal-NORC survey said the U.S. economy is the best in the world, while nearly 40% now think other nations are stronger. That’s a 15 percentage point increase since 2021.

“The gap is staggering,” Neale Mahoney, a Stanford University economics professor, told the Journal of the contrast between consumer feelings and historically strong economic indicators. One example factoring into this gap recently has been strong earnings reports on Wall Street, “which has historically translated into stronger [consumer] sentiment. But not on this occasion.”