Recession risks are climbing back onto the radar of professional forecasters, and for good reason. A weaker-than-expected July jobs report and sharp downward revisions to previous months' employment data are pushing economists to reassess the near-term outlook.
Advisors tracking macroeconomic indicators should be watching several data points closely, as signs of a slowdown become harder to ignore.
The U.S. economy added just 73,000 jobs in July—well below expectations—and prior job gains for May and June were revised lower by a combined 258,000. According to Morgan Stanley, that’s the largest two-month revision outside of the pandemic period in nearly five decades.
These figures are fueling concerns that the economy could be moving from a soft-landing scenario to the edge of a downturn. Markets are responding accordingly, with increasing skepticism that growth will hold up through 2025 without deeper damage.
“We're on the precipice of recession. That's the clear takeaway from last week’s data,” wrote Mark Zandi, chief economist at Moody’s, over the weekend. “The labor market is weakening, and that shift is starting to influence spending and sentiment in ways that could accelerate the slowdown.”
Kevin Gordon, senior investment strategist at Charles Schwab, echoed this view in a client note: “There was a definite narrative shift on Friday due to the depth of the payroll revisions. These aren’t minor adjustments—they fundamentally change the momentum of the labor market.”
For wealth advisors helping clients navigate uncertain terrain, here are the top indicators economists are watching as potential early warning signs of a recession.
Labor Market Data Takes Center Stage
The jobs market is now front and center. Advisors should pay close attention to the next nonfarm payrolls reports—particularly the pace of job creation and the trajectory of the unemployment rate.
“If the trend of weaker job growth from May to July continues, coupled with even a modest rise in unemployment, that would significantly raise the likelihood that we’re entering recessionary territory,” said Schwab’s Gordon.
Goldman Sachs economists noted that the labor market is approaching “stall speed,” where soft job gains lead to declining confidence, reduced spending, and ultimately further job losses—a self-reinforcing cycle. The bank’s estimate of trend job growth has dropped sharply in light of the recent revisions.
Morgan Stanley put a number on it: the magnitude of the two-month downward revision raises the odds of a recession by 9 percentage points, based on their historical models. For advisors, that level of risk warrants a fresh assessment of portfolio allocations that may still be tilted toward growth.
Consumer Spending Is Beginning to Falter
Another red flag is showing up in consumer spending, long the backbone of U.S. economic resilience. While aggregate spending edged higher in June, underlying data suggests that households are pulling back in meaningful ways.
Personal consumption expenditures on durable goods fell to $2.24 trillion in June, down approximately $40 billion from April's peak, according to the Bureau of Economic Analysis. That’s a sign that consumers may be losing confidence or tightening their belts in response to weaker job prospects.
“The assumption that the U.S. economy is on solid footing is starting to look rather perilous,” said Michael Brown, senior research strategist at Pepperstone. “If the labor market continues to deteriorate, we should expect a hit to consumption soon after.”
Even services spending—previously a bright spot—is beginning to soften. The ISM Services Index slipped to 50.1 in July from 50.8 in June, inching closer to contraction territory.
“Spending on services has already slowed significantly from last year’s pace,” noted Oliver Allen, senior U.S. economist at Pantheon Macroeconomics. “Given the drag on real incomes from tariffs and a weakening labor market, any sharp rebound is unlikely. More likely, we’re heading toward stagnation.”
Advisors may want to focus client conversations on risk management—especially with regard to consumer-driven equities, discretionary sectors, and credit exposure tied to household balance sheets.
Fed Policy Is Not a Guaranteed Safety Net
The Federal Reserve is expected to cut interest rates by 25 basis points in September, but that alone may not be enough to cushion the economy.
"Consumer spending has flatlined, construction and manufacturing are contracting, and employment is set to fall," Zandi wrote. “And with inflation creeping back up, it’s tough for the Fed to come to the rescue with aggressive easing.”
This presents a dilemma for investors and advisors alike: monetary policy may be too constrained to offset recessionary forces, especially if inflation proves sticky. In other words, the usual playbook—rate cuts to spur demand—may not work as effectively in this environment.
Strategic Implications for Wealth Managers
For RIAs and wealth advisors, the implications are clear: the macro environment is shifting, and so should client strategy. A renewed focus on downside protection, liquidity management, and tactical asset allocation is warranted.
Consider the following moves:
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Reassess equity exposure, particularly in consumer discretionary and cyclicals that may be vulnerable to slowing demand.
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Increase quality bias in fixed income, emphasizing shorter durations and higher credit quality amid rate and growth uncertainty.
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Evaluate liquidity across portfolios to ensure clients can access cash if market conditions deteriorate.
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Emphasize scenario planning in client reviews—modeling both soft landing and hard landing paths to anchor expectations.
Recession isn’t inevitable—but the probability is rising. Advisors who are proactive in adjusting strategy now will be better positioned to guide clients through whatever lies ahead.
