The 7 parts of the US economy that are already in a recession
In the current landscape of the U.S. economy, a superficial analysis might suggest stability, with GDP growth comfortably exceeding 3% for the past two quarters and an unemployment rate of 4.4% that remains low by historical standards. However, a deeper examination reveals troubling signs beneath this seemingly healthy facade. As noted by Treasury Secretary Scott Bessent, certain sectors are already experiencing recession-like conditions, indicating that the broader economic picture may be misleading. Key industries such as residential housing, commercial real estate, and restaurants are facing significant challenges that could foreshadow a downturn. For instance, the home construction sector is grappling with a surplus of unsold homes, leading builders to scale back on new projects, while commercial real estate investments have been declining for six consecutive quarters, signaling a lack of future growth.
The implications of these struggles are far-reaching. In the restaurant industry, major chains like Chipotle and Sweetgreen are witnessing sluggish sales growth, particularly among younger consumers, which has led to tighter profit margins and potential layoffs. Similarly, the public sector is under pressure as state and local governments exhaust COVID-era funding, raising the likelihood of job losses in these areas. Additionally, other sectors such as freight, mining, and higher education are also showing signs of weakness, with declining demand for goods transportation and budget cuts in educational institutions leading to staffing reductions. As a result, the labor market is experiencing a gradual cooling, with declining job openings and a rise in layoffs, particularly affecting workers at the margins, such as younger individuals and Black Americans.
The interconnectedness of these economic dynamics suggests that a downturn in one sector could trigger a broader economic slowdown. As job security diminishes, consumer spending may decline, creating a vicious cycle that further exacerbates unemployment and weakens business revenues. While the economy may appear stable from a distance, the underlying currents suggest that caution is warranted. As Neil Dutta, head of economics at Renaissance Macro Research, highlights, the potential for abrupt shifts in labor market conditions looms large, and the risk of recession cannot be ignored. Understanding these nuanced developments is crucial for anticipating the future trajectory of the economy, as the calm surface may be concealing more turbulent waters below.
Getty Images; Tyler Le/BI
When describing the health of the US economy, there is a temptation among economists, market analysts, and politicians to argue that the only true picture of our current situation is a sweeping portrait — only by looking at the broadest of aggregate statistics can you determine the state of play, they argue. But the wide view can ignore important developments
unfolding under the surface
. Sometimes, even the healthiest-looking person might have high cholesterol.
Right now, the economy seems OK on the surface.
GDP growth
has been running north of 3% for the last two quarters. In the labor market, the boilerplate appears to be that conditions are gradually cooling, but nothing more, nothing less. For example, despite the slowdown in new hiring,
the unemployment rate of 4.4%
is still low by historical standards. But there are serious dangers lurking beneath the surface of our economy, and it is better to clearly identify them than to ignore them in favor of broad aggregate measures.
Major employers in
industries like homebuilding
and restaurants are looking shaky, and they offer ominous signs about the direction of the overall economy. By getting a sense of what sectors and industries are struggling, you can get a forward-looking sense of the economy’s trajectory and a clearer-eyed view of the possibility of recession.
The problem with relying on broad bundles of data is that things typically appear placid on an aggregate level right up until things go wrong. Take the turning of
the job market tide
. In a genuine downturn, the consensus typically assumes a gradual, linear increase in unemployment, similar to the slow, steady grind we are currently experiencing. In reality, however, the risk is nonlinear. When things truly turn south, it usually comes as an abrupt shift that results in a negative self-reinforcing feedback loop. Instead of a slow
increase in the unemployment rate
of 0.1 percentage points a month, you begin to see a jump of 0.2 points one month and another 0.3 points the next. The ranks of the jobless swell at an ever-increasing pace. There is no real way of knowing when labor market conditions will transition from linear to nonlinear. Historically, the consensus never sees the shift until well after it has arrived. That things seem to be evolving in a stable fashion now doesn’t negate the possibility of an unstable move later.
This is why, when making predictions about the future path of the economy, it is essential to get under the hood. And right now, the closer you look, the more worrying things become. Don’t just take my word for it, Treasury Secretary Scott Bessent recently acknowledged that sectors of the economy are already in serious downturn territory.
“I think we are in good shape, but I think that there are sectors of the economy that are in recession,” Bessent told CNN in an early November interview.
While Bessent didn’t go into much detail about the parts of the American economy that concern him, a close read reveals the most worrying signals are coming from four major sources of employment:
Residential housing:
There are several signs that employment in home construction is about to hit the skids. The
elevated stock of unsold homes
means homebuilders will need to throttle back on breaking new ground and focus on
selling the inventory
they have on hand. Building permits also indicate a potential weakness in future construction activity. Add this up, and it’s clear that the industry is likely holding onto too many workers relative to its current activity levels.
Commercial real estate:
Investment in structures for business has been declining for the last six quarters, per the latest GDP data, even accounting for the massive
buildout of AI data centers
. Architectural billings, an index that tracks nonresidential construction, released by the American Institute of Architects, remain sluggish. Given that a building first has to be drawn up before it can be built, weakness at this planning stage suggests there is no coming boom in commercial real estate construction. Based on the latest release, it appears that soft conditions are likely to persist next year.
Restaurants:
We’ve seen major casual dining establishments,
such as Chipotle and Sweetgreen
, post weaker sales growth in recent quarters, largely due to weakness in certain consumer cohorts, including 25-34 year olds. Despite this, many chains have said they plan to absorb higher food input prices caused by supply shocks, thereby squeezing their margins. Slower sales and slimmer profits are not a recipe for more hiring. In fact, declining measures of productivity per worker in food services & drinking places suggest that many of these restaurants are overstaffed and may be a signal that layoffs are on the horizon.
Government:
Until now, most of the pressure on public sector employment has been at
the federal government level
. However, state and local governments are facing pressures as they exhaust COVID-era funding. Given these tough decisions, job losses in state and local governments are a reasonable baseline.
Beyond these big four, there are industries with a smaller employment footprint that also appear to be softening:
Freight:
There are not as many goods moving around the country. Ship counts from Asia to the US are down roughly 30% from last year. Railcar loadings are down roughly 6% against last year. The
trucking industry
also continues to see shrinking capacity. If there are fewer things to move around the country, then the industry will likewise need fewer drivers, loaders, and various workers. Idle trains and empty containers don’t need a lot of people to mind them.
Mining:
Crude oil prices
are somewhat below the level needed to profitably invest in new drilling wells, so energy companies are unlikely to hire new staff in this area. The same is true for wood products.
Lumber prices
are below the levels at which most sawmills can turn a profit. Mining and logging are a relatively small part of private employment, but they’re decreasing, not increasing.
Higher education:
Declining enrollment, budget cuts, and
reduced federal research funding
are taxing the higher education sector. Not surprisingly, more colleges and universities are turning to staffing cuts. Employment across colleges and universities has remained flat so far in 2025 compared to last year, but given the budget shrinkage, it’s hard to see how this resilience persists.
It’s taken a while to unfold, but the labor slowdown has played out in a standard way: job openings have declined, hiring rates have cooled as companies have slowed their pace of recruiting, and we’re now beginning to see an increase in layoffs from historically low levels. The workers at the margins — like younger people and Black Americans — have felt it more than those in more secure positions, which is also not unusual.
Recession-like dynamics across several different industries increase the risk of additional layoffs in those same key sectors in the quarters ahead. Because the hiring rate is low, a small increase in layoffs may have a disproportionately large effect on unemployment. Just because conditions seem to be gradually cooling today does not close the door on a more abrupt shift in labor market conditions later.
The labor market remains a source of downside risk for the broader economy. Because consumption has been a source of support for the economy, a deeper slowdown in the jobs market would create a nasty downward spiral: People cut back on their spending as they lose their jobs, which dries up sources of revenue for businesses that then lay off more workers in response, which further shrinks the amount of household spending, and so on.
Where all this ends up is still up for debate. But while America’s economic ocean appears placid at 30,000 feet, beneath the surface, several riptides are brewing.
Neil Dutta
is head of economics at Renaissance Macro Research.
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