For much of 2025, Wall Street has struck a confident tone. Economists and investors alike continue to argue that the U.S. economy has the strength to avoid recession, even as growth cools. The prevailing message has been that the economy remains resilient: unemployment is low, consumer spending is steady, and equity markets have rewarded investors with strong returns.
Yet advisors guiding client portfolios cannot ignore the cracks forming beneath the surface. Labor market dynamics, in particular, are showing signs of weakness that have historically preceded downturns. Payroll growth has slowed sharply, official data has been revised down substantially, and several respected strategists are warning that the probability of a recession is rising. For advisors, this moment calls for careful evaluation: headline optimism must be balanced against hard data and historical precedent.
Labor Market Weakness Emerging
While unemployment remains low by historical standards, the underlying momentum of job creation is slowing. Payroll growth has stayed under 100,000 new jobs per month for four straight months. In past cycles, such sustained weakness has rarely occurred outside of recessionary environments. This is not a minor slowdown; it is a meaningful divergence from the robust hiring that characterized the recovery of 2021 and 2022.
Adding to concerns, the Bureau of Labor Statistics recently admitted to overstating job growth by 911,000 positions over the last twelve months. That revision matters. For advisors, it suggests that the economic foundation supporting bullish narratives may be weaker than investors believe. Clients relying on the “strong jobs market” story should understand that the data has shifted.
Edwards’ Bearish Warning
Albert Edwards, the long-time Société Générale strategist often labeled an “uber-bear,” has drawn attention to these labor market signals. Edwards has a reputation for caution, but his recent note to clients highlights charts and models that are difficult to dismiss. His analysis points to three distinct indicators—all suggesting that recessionary risks are rising.
The first comes from Moody’s Analytics, whose chief economist Mark Zandi is not known for alarmist calls. Yet Zandi recently described recession odds as “uncomfortably high.” Moody’s model currently assigns a 48% probability to recession. Historically, recessions have followed whenever the model passes the 50% threshold.
This model factors in unemployment trends, inflation levels, and the shape of the Treasury yield curve. Advisors know that the yield curve inversion has been one of the longest and deepest in decades, a signal that has historically been one of the most reliable predictors of recession. While Edwards acknowledges that models can only go so far—topping out near 62% probability even in deep recessions—he argues that today’s 48% reading is a meaningful red flag.
The Unemployment Moving Average Signal
Edwards’ second chart examines the U3 unemployment rate against its 36-month moving average. Historically, whenever the unemployment rate crosses above this long-term trendline, recession has soon followed. That crossover occurred in May of last year. While the economy has not yet tipped into a downturn, Edwards points out that the lag this cycle is unusually long.
For advisors, this is an important signal. The unemployment rate is often viewed as a lagging indicator, but when compared to its long-term average, it can serve as a leading marker of turning points in the cycle. If history holds true, the U.S. economy may be closer to contraction than the consensus view suggests.
The Kansas City Fed’s Labor Market Conditions Index
The third indicator Edwards highlights is the Kansas City Federal Reserve’s Labor Market Conditions Index (LMCI). This composite model tracks 24 labor market metrics, including job openings, quit rates, hours worked, wages, and unemployment claims. Historically, sharp declines in the LMCI have aligned closely with the onset of recessions.
The current reading has been in steady decline for several years, flashing warning signs that labor market conditions are deteriorating. Yet equity markets have continued to climb, buoyed by enthusiasm for artificial intelligence and the strong earnings of mega-cap technology firms. This divergence between economic fundamentals and market performance underscores the complexity of today’s environment: while parts of the economy are softening, the largest drivers of index performance remain robust.
Mixed Signals: What’s Holding Up
Not all labor data points are flashing red. Initial and continuing unemployment claims remain historically low, suggesting that layoffs are not yet widespread. Many clients hear these numbers and conclude that the labor market remains healthy. Advisors should clarify that while claims data shows resilience, it represents only part of the labor market picture. Slowing payroll growth and structural weakness in labor conditions may not yet be visible in weekly claims but can still signal trouble ahead.
Another stabilizing factor is the Federal Reserve’s shift in policy. At its September meeting, the Fed cut interest rates by 25 basis points—the first rate cut of 2025—citing labor market weakness as a driving factor. Policymakers signaled that two more cuts are likely this year. For markets, this easing is seen as supportive: lower borrowing costs can stimulate demand and help businesses sustain hiring. However, advisors should remember that the Fed often begins cutting rates just as the economy is slowing, not before. Historically, rate cuts have frequently coincided with the onset of recessions rather than prevented them.
Implications for Advisors
For wealth advisors and RIAs, these signals carry several implications for portfolio construction and client communication.
1. Scenario Planning Over Forecasting
Rather than trying to pinpoint whether a recession will occur in 2025, advisors should build portfolios that are resilient to a range of outcomes. The uncertainty surrounding labor market trends and the Fed’s policy path means flexibility is more valuable than precision.
2. Defensive Equity Positioning
Clients heavily concentrated in cyclical or growth sectors may be vulnerable if earnings disappoint. Defensive sectors such as healthcare, utilities, and consumer staples have historically held up better when economic growth slows. Advisors should evaluate whether allocations reflect this balance.
3. Fixed Income as a Portfolio Anchor
After years of low yields, Treasuries and investment-grade bonds now provide meaningful income and potential downside protection. Advisors may consider a barbell strategy, blending shorter maturities for liquidity with longer Treasuries for recession hedging.
4. Alternatives and Real Assets
Gold, infrastructure, and private credit may serve as diversifiers, especially if traditional stock-bond correlations weaken further. Gold, in particular, has historically performed well when labor market weakness prompts easier monetary policy.
5. Watch Credit Exposure
If labor market conditions deteriorate, high-yield bonds could face pressure. Advisors should evaluate credit quality within client portfolios, ensuring that exposure to weaker issuers is limited.
6. Liquidity Management
Clients with substantial private equity or illiquid holdings should review liquidity plans. Recessions often create stress points when cash needs rise unexpectedly. Advisors can add value by ensuring that clients have the flexibility to manage through volatility.
Communicating With Clients
Advisors also face the task of contextualizing these developments for clients. Many investors are encouraged by the strong performance of equity markets this year and may resist discussions about rising risks. Advisors can frame the conversation by distinguishing between short-term market momentum and underlying economic conditions.
Clients should understand that the goal is not to forecast doom but to prepare portfolios for a broader range of outcomes. By showing clients how labor market data, yield curve signals, and Fed actions fit together, advisors can reinforce their role as strategic guides who look beyond the headlines.
Looking Forward
The next several months will be critical in determining whether the labor market weakness evolves into a full recession or stabilizes. Advisors should monitor weekly jobless claims, revisions to payroll growth, and small business hiring surveys for early signs of deeper cracks. Meanwhile, corporate earnings reports will provide clues about how companies are managing labor costs and consumer demand.
The Federal Reserve’s policy moves will also shape the landscape. If inflation continues to cool, further rate cuts could extend the expansion. If inflation stalls or reaccelerates, the Fed’s options may be more limited, raising risks for both markets and the economy.
Conclusion
Wall Street’s optimism may be reassuring, but the labor market data tells a more complicated story. Slowing payroll growth, downward revisions, and declining labor market indicators are flashing warning signs. Advisors cannot afford to take the consensus view at face value.
By preparing portfolios with defensive positioning, thoughtful diversification, and robust liquidity planning, advisors can help clients weather whatever lies ahead. Whether the U.S. achieves a soft landing or slips into recession, the value of proactive, data-driven advice will be clear.
In this environment, the most important role of the advisor is to translate uncertainty into action—helping clients protect their wealth, stay invested with discipline, and capture opportunities even in a more volatile market cycle.
