Wall Street’s view of a ‘Kevlar economy’ has just been shattered, but red flags were lurking under the radar

Economy·U.S. jobs reportWall Street’s view of a ‘Kevlar economy’ has just been shattered, but red flags were lurking under the radarBy Jason MaBy Jason MaWeekend EditorJason MaWeekend EditorJason Ma is the weekend editor at Fortune, where he covers , the economy, finance, and housing.SEE FULL BIO "Something always goes wrong eventually — whether it’s a risk hiding in plain sight or something you couldn’t see coming."Getty ImagesJust as Wall Street was warming up to the hope that the U.S. economy was bulletof amid President Donald Trump’s trade war, the recent batch of indicators has punctured that notion

But not everyone was surprised, as some economists had previously sounded the alarm on various red flags that are associated with downturns

The recent batch of indicators has punctured the notion on Wall Street that the U.S. economy is bulletof and can withstand headwinds President Donald Trump’s trade war

That was evident in Friday’s stock market selloff as the dismal jobs report and shocking downward revisions to earlier months raised recession fears

But not everyone was surprised, as some on Wall Street had previously sounded the alarm on overoptimism and various red flags that are associated with downturns

In a note on Tuesday, James St

Aubin, CIO of Ocean Park Asset Management, warned that investors were leaning too heavily on the narrative of economic resiliency

The idea of a “Kevlar economy” had fueled complacency that was showing up in stretched valuations, tight credit spreads, and an underpricing of risk, he added, referring to the synthetic fiber used in bulletof vests

One of the risks is political pressure creeping into the Federal Reserve’s decision-making, St

For months, Trump and the other White House officials have demanded Fed rate cuts, even suggesting that cost overruns on a headquarters renovation ject are grounds for Chairman Jerome Powell to be ousted

Another risk is that stock market investors viewed tariffs as a temporary speed bump that would be offset by tax cuts and the sector’s capital spending splurge on AI

Aubin pointed out that tariffs hit es unevenly, with some are far more exposed than others. “If you believe in resiliency too much, you’re not being fully compensated for the risks you’re taking,” he added. “Something always goes wrong eventually — whether it’s a risk hiding in plain sight or something you couldn’t see coming.” Consumer spending on services To be sure, the U.S. economy had previously demonstrated surprising durability

But it never came, and inflation cooled sharply

And earlier this year, economists feared Trump’s tariffs would fuel a big spike in inflation

But while some import-sensitive areas have seen an uptick, the overall rate has been more muted, so far

However, a deeper dive into some of the headline numbers revealed troubling signs

Spending on food services and recreational services, which includes things gym memberships and ing subscriptions, were barely higher

Meanwhile, transportation spending was down 1.1%, led by declines in auto maintenance, taxis and ride-sharing, and air travel, which had the steepest drop at 4.7%. “The fact that households are putting off auto repair, not taking an Uber and cutting back or eliminating air travel points to stretched household budgets,” Wells Fargo said

Housing market In May, Citi Re recalled that the late economist Ed Leamer famously published a paper in 2007 that said residential investment is the best leading indicator of an oncoming recession. “We would be wise to heed his warning,” Citi said

In fact, residential fixed investment shrank 4.6% in the second quarter, according to data released Wednesday, after contracting 1.3% in the first quarter

And overall construction spending continued to decline in June, led by a steep plunge in new single-family s

That’s as mortgage rates remain elevated, representing a major obstacle to affordability, while prices are still high. “Residential fixed investment is the most interest rate sensitive sector in the economy and is now signaling that mortgage rates around 7% are too high to sustain an expansion,” Citi said in May

Labor market Citi economists have long been among the less bullish on Wall Street, and before Friday’s startling payroll data, they had already sniffed out signs of weakness

In particular, they flagged a dip in the labor force participation rate, which had suppressed the unemployment rate as it meant fewer people were looking for work

Citi downplayed the notion that Trump’s immigration crackdown was primarily responsible for the lower participation rate

Instead, economists pointed to low hiring as an indication of weaker demand for workers

On Friday, Citi saw its prior warnings play out and predicted Wall Street would start to come around. “Softness that had been evident in details of the jobs report is now apparent in the headline numbers,” the bank said. “ and Fed officials should now more closely mirror our view that a low-hiring labor market, together with slowing growth create downside risk to employment and reduce the risk of persistent inflation.”Introducing the 2025 Fortune 500, the definitive ranking of the biggest companies in America

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