Markets have spent much of the last few months trading on possibilities of what could happen with the economy. But what actually ends up happening will be the true decider of market direction. To analyze what’s going on — and where things might be headed — we’ll focus on the labor market, residential construction, and consumer credit through the lens of a traffic light. Are signs looking good (green), cautionary (yellow), or bad (red)?

Labor Caution

On the surface, the U.S. labor market has mostly been a source of stability for the economy. The official unemployment rate has remained between 4.0% to 4.2% over the last 12 months, a condition that aligns well with the idea that the economy is at or near full employment. But underneath this top-line stability, some concerning signs are developing. For one, while the headlines suggest unemployment hasn’t moved much over the last year, it had actually been drifting higher for much of 2025 before June data surprised to the downside. The official headline figure, because it is rounded to one decimal place, had been 4.2% for March, April, and May before falling to 4.1% in June. But a more granular calculation reveals 4.15%, 4.19%, 4.24%, and 4.12%, respectively. Beyond that, the pace of job creation has cooled noticeably with 147,000 jobs added in June — below the average monthly gain of the prior 12 months. Also telling is the recent pattern of significant downward revisions to prior months, which lowered 2025 figures by 203,000 jobs. Historically, downward revisions tend to cluster around downturns (the reasons are complicated but center around the availability of data on businesses being started and closing).  

Job Growth Slowing

All in all, the labor market has clearly lost some of its forward momentum. The combination of decelerating job growth, downward revisions to past data, and a slowly rising unemployment rate (prior to the big drop last month) suggest that the labor market may be transitioning from an engine of growth to an idling motor. Things aren’t outright bad, however, since less hiring activity is being offset by a low layoff rate. Overall, the labor market is flashing yellow.

Halting Construction

As many people know all too well, the U.S. is dealing with a major home affordability crisis. Home prices are at historic highs, while mortgage rates have remained stubbornly elevated — even though the Federal Reserve lowered interest rates late last year by 100 basis points. With the average 30-year fixed mortgage rate at 6.8% as of July 1, the cost of financing a home is prohibitive for a large swath of the American public. This has pushed housing affordability to multi-decade lows, effectively freezing activity in what is normally a critical sector of the economy. Potential buyers are sidelined, and existing homeowners are locked in by low rates on their current mortgages, contributing to a stagnant market. The hard data shows this affordability crisis has translated into a sharp and broad-based downturn in construction activity. In May, privately-owned housing starts plummeted by 9.8% to a seasonally adjusted annual rate of 1.256 million units, the weakest level since the early days of the COVID-19 pandemic in May 2020. And while there’s still a backlog of units currently under construction (a byproduct of the building boom and supply chain shortages from a few years ago), that has rapidly been declining.  

Construction Activity Rapidly Slowing

On the transaction and listing side, the latest data shows new home sales declined by 13.7% m/m, while the inventory of unsold new homes climbed to an elevated 9.8 months’ worth of supply. The construction market isn’t just slowing down, but actively contracting and starting to weigh on economic growth. Confirming the pessimism gripping the industry, the latest National Association of Home Builders (NAHB) Housing Market Index reading fell to a reading of 32, well below the neutral value of 50. It seems like the industry is reaching a tipping point, where an inventory glut and lack of interest rate relief may conspire to finally push home prices lower. For investors, the residential construction light is clearly red.

Careful Credit

While less visible to the public than jobs or housing data, the flow of credit is the lifeblood of a modern economy. The willingness of banks to lend, and the appetite of businesses and households to borrow, are indicators of underlying economic health. When credit flows freely, it fuels business investment, home purchases, and consumer spending. When it tightens, it can weigh on economic activity. At the moment, both lenders and borrowers have been somewhat cautious. The most compelling evidence for this caution comes from the Federal Reserve's quarterly Senior Loan Officer Opinion Survey (SLOOS). The latest survey, from April 2025, showed that a significant share of banks maintained tight lending standards for most loan categories. For commercial and industrial (C&I) loans, banks reported tightening terms due to a less favorable economic outlook and a reduced tolerance for risk. Households also saw credit card standards tighten and requirements for most mortgages remain restrictive.  

Percent of Banks Tightening Credit Standards for C&I Loans

Generally speaking, the survey showed that demand for loans was iffy across the board. Given all the economic and trade policy uncertainty, businesses pulled back on capital expenditures and consumers hesitated on big-ticket purchases. But iffy demand doesn’t mean nonexistent demand, and consumer credit data has been mostly steady over the last year or so (though lower than pre-pandemic levels and 2021-22). All in all, credit gets a flashing yellow as well.

Facing the Light

With two yellow lights and one red, the economy is in a bit of a predicament. Just as it’s important for a driver to slow down when they see a traffic light flashing yellow, the same goes for investors. With stocks at record highs despite slowing economic conditions and major ongoing uncertainty, it could be prudent to ease off the accelerator.      

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