Moody’s Analytics Chief Economist Mark Zandi warned that the U.S. economy is growing below its potential, leaving it increasingly vulnerable to rising unemployment, persistent inflation and a broader slowdown.
“The economy is growing, but at a rate below its potential, so the situation is tenuous,” Zandi said in a post on LinkedIn.
“Unless growth picks up, unemployment will rise and participation will fall, and at some point, undermine growth altogether,” he added.
Growth Is Falling Short Of The Economy’s Potential
Zandi said real GDP is on track to grow by about 2% in the second quarter, extending a trend of economic expansion that has remained resilient despite tariffs, restrictive immigration policies and the US-Israel war on Iran.
While the economy continues to expand, Zandi cautioned that it was growing below its potential despite significant fiscal stimulus.
The latest warning builds on Zandi’s longstanding concerns that slowing growth, weaker household finances and elevated inflation were already straining the economy before the war raised the risk of a broader slowdown.
“The economy has been impressively resilient, given all that it has had to deal with,” Zandi wrote, but added that the economic benefits of tax cuts have largely been offset by higher gasoline prices stemming from the Iran conflict.
Labor Market Weakness Is Starting To Show
The labor market is showing signs of cooling as economic growth slows. Zandi noted that unemployment has drifted above 4%, while job growth has been largely flat since April 2025.
He also pointed to a sharp decline in labor-force participation, particularly among older workers, suggesting that headline unemployment figures may understate underlying weakness.
The softer labor backdrop is weighing on consumers, with real wage growth nearly stalled and real disposable income showing little growth over the past year.
Inflation Is Limiting The Fed’s Options
Slowing growth would typically strengthen the case for interest-rate cuts, but inflation remains well above the Federal Reserve’s 2% target, creating a difficult backdrop for policymakers.
Zandi said tariffs and the Iran war have pushed inflation to well above 3% and closer to 4%, leaving the Fed with little room to support the economy even as labor-market conditions soften.
As a result, monetary policy is likely to remain on hold for the foreseeable future, according to Zandi, who noted that a growing debate is emerging over whether the Fed may ultimately need to raise rates if inflation expectations continue to climb.
“However, if inflation expectations become unmoored, the Fed will almost surely raise rates, even if this means pushing the economy into a recession,” Zandi wrote. “It is better to take the economic pain up front than to experience more severe pain down the road.”
Despite the growing risks, Zandi stopped short of forecasting a recession, arguing that avoiding a broader downturn will likely require both an end to the Iran war and continued AI-driven growth. “This is certainly doable, but not a given,” he wrote.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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