7 Deadly Signs of the U.S. Economy! Renowned Expert: GDP Data Masks the Truth of Recession

Neil Dutta, the chief economist at Renaissance Macro Research, wrote that despite the U.S. GDP growth remaining above 3% and the unemployment rate being at historic lows, several industry indicators are signaling a clear economic recession, covering key areas such as residential construction and commercial real estate. Treasury Secretary Scott Bessent has rarely acknowledged that some sectors in the U.S. have fallen into recession.

Structural cracks behind 3% GDP growth

(Source: Bloomberg, Renaissance Macro)

Dutta pointed out that, from a macro perspective, the U.S. economy still presents a relatively robust appearance. In the past two quarters, U.S. GDP growth has exceeded 3%, and although the unemployment rate has risen to 4.4%, it remains below historical averages. Many economists, market analysts, and politicians believe that the U.S. economy is operating well overall. However, the bright surface of macro data may mask the gradually worsening structural pressures within. Just as a healthy person might be accumulating high cholesterol inside, the U.S. economy hides several dangerous signals beneath its strong facade.

Relying solely on broad indicators when making judgments about economic operations often leads to misjudgments. Historical experience shows that even before a severe economic recession arrives, macro-level data may remain stable until the situation suddenly deteriorates. For example, before a real turning point in the labor market appears, the unemployment rate typically rises slowly in a linear fashion, but once it shifts into a recessionary pattern, the unemployment rate often jumps several percentage points within just a few months, creating a self-reinforcing negative cycle.

U.S. Treasury Secretary Yellen pointed out earlier this month that the overall condition of the U.S. economy is “fairly good, but some sectors are already in recession.” Although he did not specify the exact areas, existing data shows that the problems are mainly concentrated in four major employment pillar industries: residential construction, commercial real estate, the restaurant industry, and state and local government sectors. The Treasury Secretary's rare acknowledgment indicates that these issues have become serious enough to be ignored, adding official corroboration to Neil Dutta's warnings.

Therefore, understanding the trends of the U.S. economy requires a deep observation of the internal dynamics within various industries, and this “underlying perspective” is revealing increasingly concerning signs. Dutta has outlined the “seven major warning signals of the U.S. economy,” and these deep-seated changes indicate that the U.S. economy may be far more fragile than it appears on the surface.

Seven Major Fatal Signals Explained: Comprehensive Pressure from Real Estate to Education

(Source: Bloomberg, Renaissance Macro)

First, in the residential construction sector, inventory pressure is rapidly accumulating. The inventory of new homes across the U.S. is at a multi-year high, while the decline in building permits indicates that future construction activity will decrease significantly. This means that the current number of employees in construction companies has exceeded the actual demand in the industry, and the risk of layoffs in the construction sector is significantly increasing in the coming months. The construction industry is one of the important pillars of employment in the U.S., and its weakness will directly affect the income and purchasing power of millions of workers.

Secondly, commercial real estate investment has declined for six consecutive quarters. Even though the construction of artificial intelligence data centers has boosted some demand, the overall weak trend has not improved. The architect billing index, as a leading indicator, also remains low, indicating a scarcity of new commercial real estate projects, and the industry is in a deep contraction phase. The popularity of remote work has led to a sharp decline in demand for traditional office buildings, while commercial retail spaces continue to shrink due to the rise of e-commerce.

(Source: Bloomberg, Renaissance Macro)

Third, the growth of the food and beverage industry has significantly slowed down. Several chain brands have reported weak sales growth, especially among the core consumer group aged 25 to 34, where spending has decreased. At the same time, the unit labor productivity in the industry continues to deteriorate, forcing companies to absorb higher raw material costs, thus squeezing profit margins. As profitability declines, many food and beverage companies may have to resort to layoffs to maintain operations. The food and beverage industry is one of the largest private sector employers in the United States, employing over 15 million people, and its weakness cannot be underestimated in terms of its impact on the overall job market.

(Source: Bloomberg, Renaissance Macro)

Fourth, state and local governments are gradually exhausting the additional financial support during the pandemic, leading to rising fiscal pressures, and government employment may soon enter a declining phase. The growth of government positions at all levels has been an important support for the labor market, and once it reverses, it will exacerbate pressure on the labor market. Many state governments expanded the scale of public services during the pandemic, and now, with the end of federal aid, it is difficult to maintain these positions.

Fifth, industries such as freight, mining, and higher education, although having a smaller employment volume, also show signs of simultaneous decline. Freight activities have significantly decreased, with shipping volumes from Asia to the United States dropping by about 30% compared to last year, railway freight volume decreasing by about 6%, and the trucking industry continuing to contract. Due to the reduction in goods transportation volume, companies no longer require a large number of drivers, forklift operators, and logistics personnel. Freight volume is considered a real-time indicator of economic activity, and its decline often signals a general slowdown in business activities.

Sixth, the energy and timber industries are similarly under pressure. The price of crude oil is below the profitability level of most new well investments, causing energy companies to turn towards contraction; timber prices are also weak, leading to operational difficulties for sawmills. The weakness in these two fundamental industries reflects a decline in overall economic demand, as energy and timber are basic inputs for almost all manufacturing and construction activities.

Seventh, in the field of higher education, the decline in enrollment numbers, budget cuts, and reductions in federal research funding have collectively constrained schools' spending capacity, leading more universities to freeze hiring or even lay off staff. Universities are not only educational institutions but also important regional economic engines and job providers, and their contraction will have a ripple effect on surrounding communities.

Seven Major Danger Signals of the U.S. Economy

Residential Construction: New home inventory at multi-year highs, building permits declining, layoff risks rising.

Commercial Real Estate: Investment declines for six consecutive quarters, architect billing index remains sluggish.

Food and Beverage Industry: Core consumer spending has decreased, squeezing profit margins.

Government Employment: With pandemic financial support running out, state and local government positions may decline.

Freight Logistics: Shipping volume decreased by 30%, railway cargo volume decreased by 6%, the industry continues to contract.

Energy Timber: Crude oil prices are below profit levels, timber prices are weak, and companies are turning to contraction.

Higher Education: Declining enrollment, budget cuts, universities freezing hiring or even layoffs.

Non-linear Decline Risks in the Labor Market

(Source: Bloomberg, Renaissance Macro)

Overall, the downward trend in the US labor market has begun to take shape. The decrease in job vacancies, slowing hiring pace, an uptick in layoffs from a low point, and declining expectations for job opportunities all indicate that the resilience of the labor market is waning. More concerning is that if layoffs increase further, due to a significant drop in hiring willingness, even small-scale layoffs could rapidly push the unemployment rate higher, leading to nonlinear shocks to the economy.

(Source: Bloomberg, Renaissance Macro)

If the labor market rapidly deteriorates, consumption will contract simultaneously, forming a typical “economic recession cycle”: layoffs lead to income decline, reduced spending, and corporate revenue drops which force more layoffs, further dragging down consumption. If this feedback mechanism forms, it will quickly impact the overall level of economic activity. Historical experience shows that once the economy enters this vicious cycle, large-scale fiscal stimulus or monetary easing is usually needed to reverse it.

Neil Dutta's analysis reveals the core paradox currently facing the U.S. economy: surface data shows that the economy is still growing, but an increasing number of sectors are contracting. This divergence cannot continue indefinitely; ultimately, either the weak sectors will recover or the strong sectors will be dragged down. Based on current trends, the likelihood of the latter is increasing.

The article concludes that although the U.S. economy appears to be stable at a macro level, several industries have entered a state similar to recession. As these “underwater currents” increase, the U.S. economy may be more fragile than it seems on the surface, with a potential for a more severe downturn at any moment. For investors, this warning suggests closely monitoring employment and revenue data at the industry level, rather than solely relying on macro indicators like U.S. GDP. For policymakers, these signals serve as a reminder to prepare countermeasures in advance to avoid a sudden outbreak of economic recession.