U.S. Recession Signals Intensify: Zandi Warns One-Third of Economy is Already in or Near Recession

The U.S. economy is teetering on the edge of a recession, with nearly one-third of its GDP already in or near a downturn, according to Mark Zandi, chief economist at Moody's Analytics. As of August 2025, 22 states and the District of Columbia—accounting for 33% of U.S. economic output—are in recession or at high risk of slipping into one. Another third of the economy is “treading water,” while only 16 states remain in expansion. This fragmented landscape demands a strategic shift in investment portfolios, emphasizing defensive sectors and hedging tools to preserve capital amid rising uncertainty.

Sectoral Preparedness: Who's Vulnerable, Who's Resilient?

Zandi's analysis reveals stark contrasts across industries. Construction and manufacturing are already in recession, with job cuts accelerating and supply chains strained by tariffs. Meanwhile, healthcare remains a rare bright spot, adding jobs at a meaningful pace. For investors, this divergence underscores the need to prioritize sectors with structural resilience and avoid overexposure to cyclical industries.

1. Defensive Sectors to Prioritize
2. Healthcare (XLV ETF): The sector's demand is inelastic, driven by aging demographics and technological advancements. Companies like UnitedHealth Group (UNH) and Medtronic (MDT) are well-positioned to outperform in a downturn.
3. Utilities (XLU ETF): Essential services and regulated pricing models make utilities a safe haven. NextEra Energy (NEE) and Dominion Energy (D) offer stable dividends and low volatility.

4. Consumer Staples (XLP ETF): Basic needs remain resilient. Procter & Gamble (PG) and Coca-Cola (KO) have strong balance sheets and pricing power.

5. Vulnerable Sectors to Avoid

6. Construction and Real Estate: Elevated costs and labor shortages are stifling growth. Avoid overleveraged developers and materials firms.
7. Manufacturing: Tariffs and supply chain disruptions are eroding margins. Automotive and industrial equipment firms face heightened risks.
8. Technology (XLK ETF): While tech has long been a growth engine, speculative valuations and AI-driven job displacement could amplify volatility.

Defensive Investing Strategies: Hedging and Diversification

With a 49% probability of a recession within 12 months, investors must adopt a multi-layered approach to mitigate risk:

1. Allocate to High-Quality Bonds and TIPS
2. Treasury Inflation-Protected Securities (TIPS): Protect against inflation while capitalizing on rising yields.

3. Municipal Bonds (MUB ETF): Tax-advantaged income from resilient state and local governments.

4. Leverage Gold and Commodity ETFs

5. Gold (GLD ETF): A traditional hedge against market selloffs and currency devaluation.

6. Energy (XLE ETF): Energy prices may stabilize as demand shifts, but volatility remains a concern.

7. Diversify with Global Exposure

8. Emerging Markets (EEM ETF): Diversify away from U.S.-centric risks, though geopolitical tensions add complexity.
9. Japan (EWJ ETF): A low-debt economy with structural reforms could offer stability.

Roadmap for Capital Preservation

1. Rebalance Portfolios Toward Defensive Weights
2. Shift 20–30% of equity allocations to healthcare, utilities, and consumer staples.

3. Reduce exposure to cyclical sectors like construction and manufacturing.

4. Adopt a “Barbell Strategy”

5. Combine high-quality defensive stocks with a small allocation to high-growth tech (e.g., Microsoft (MSFT) or Amazon (AMZN)) to balance safety and upside potential.

6. Use Options for Hedging

7. Purchase put options on broad indices (e.g., S&P 500) to limit downside risk.

8. Consider covered calls on defensive stocks to generate income.

9. Monitor Policy and Data Signals

10. Track the Conference Board's Leading Economic Index (LEI) and Federal Reserve policy shifts.
11. Watch for a bond market selloff, which could trigger a spike in long-term yields and accelerate a downturn.

Conclusion: Navigating the Precipice

The U.S. economy is at a critical inflection point, with policy-driven headwinds and sectoral imbalances creating a volatile environment. While a full-scale recession is not yet inevitable, the risks are mounting. Investors must act proactively by prioritizing defensive sectors, hedging against inflation and market declines, and maintaining liquidity. As Zandi notes, the coming months will determine whether the economy stabilizes or spirals into a deeper downturn. By aligning portfolios with structural resilience and strategic flexibility, investors can safeguard capital and position themselves to capitalize on opportunities in the post-recession landscape.