The U.S. economy is teetering on the edge of a recession, with key indicators showing signs of stress even as headline numbers paint a rosier picture, according to Dr. Vince Malanga, president of LaSalle Economics. He warns that “the economy is inching closer to some sort of recession,” pointing to persistently sluggish growth and deteriorating labor conditions beneath the surface.
While official unemployment rates remain low, Dr. Malanga notes that these figures are “being held down by weak labor participation.” He explains, “In June, Household employment was flat relative to May, and it was 500,000 workers below January’s level.” Compounding the issue, June saw a decline in the average workweek, the slowest rise in private payrolls this year, and a drop in aggregate hours worked. “Aggregate hours worked declined in June and were flat over the past three months,” Malanga observes, highlighting the hidden frailty in the labor market.
Despite expectations that the initial round of Trump administration tariffs would fuel inflation, that impact has yet to materialize. “If GDP growth was 2.5% annually as forecast by the Atlanta Fed model, it was all in faster productivity,” Malanga points out, suggesting that productivity gains and deregulation are offsetting price pressures for now. Still, he cautions that “a second round of tariffs is now in play, adding uncertainty to business decisions and to Federal Reserve policy choices.”
Malanga remains cautiously optimistic on inflation: “Productivity growth, the benefits of deregulation, and weak demand will continue to hold down goods price increases. With housing costs moderating and energy prices more stable, inflation could still hit the Fed’s target once near-term calendar effects pass.”
Malanga also flags ongoing volatility in energy markets, driven by persistent Russia-Ukraine tensions and potential renewed sanctions against Iran. “OPEC is adding about 2 million barrels per day to the market in monthly increments,” Malanga notes. While OPEC has agreed to speed up production adjustments, actual output still lags targets, serving as a reminder that supply risks remain.
On the fiscal front, the passage of the “One Big, Beautiful Bill” is expected to be “mildly stimulating to the economy in the near term and more stimulative longer term as the benefits of full expensing of structures and equipment gain momentum.”
Yet, bond markets are uneasy about the bill’s deficit implications. Malanga recommends two steps to restore market confidence: “First, the administration must hone its message of the noninflationary growth aspects of the package… Second, the Federal Reserve needs to make up for lost time and cut interest rates to accommodate economic growth. If inflation and inflationary expectations remain contained as we expect, bond markets will become comfortable and long rates will fall.”
Malanga underscores the centrality of the housing sector to any economic recovery. “The key to restoring growth is housing, which has and continues in recession,” he asserts. He believes that “were the 10-year treasury note to fall below 4% and stay there, mortgage rates will decline, and housing could then reassume its role as a leading indicator, spurring overall growth and easing deficit concerns.”
Malanga concludes on a note of guarded hope: “The process becomes self-reinforcing once the gears are set in motion.”
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