Zandi Warns One-Third of U.S. States at Risk of Economic Recession

Moody’s Chief Economist Flags Rising Recession Risks Across U.S. States

Concerns about a potential economic downturn are mounting as Mark Zandi, the chief economist at Moody’s Analytics, highlights increasing vulnerabilities within the U.S. economy. His latest analysis underscores that a significant portion of states contributing to the national GDP are either experiencing recessions or teetering on the edge.

In his recent social media posts on Sunday, Zandi elaborated on his earlier statement that the U.S. is on the precipice of a recession. He revealed that nearly one-third of the states contributing to the U.S. GDP are either in a recession or face a high probability of entering one. Another third of the states are maintaining their current economic status, while the remaining third continue to grow.

“States experiencing recessions are spread across the country, but the broader D.C. area stands out due to government job cuts,” Zandi remarked. He noted that Southern states remain the most robust, although their economic growth is beginning to slow. Meanwhile, California and New York, which collectively represent over 20% of the U.S. GDP, are maintaining their economic stability, playing a crucial role in preventing a nationwide downturn.

The Atlanta Fed’s GDP tracker indicates that while the U.S. economy is still growing, the pace is expected to slow from 3% in the second quarter to 2.3% in the third quarter.

State Economic Performance Breakdown

• Recession/high risk (22): Wyoming, Montana, Minnesota, Mississippi, Kansas, Massachusetts, Washington, Georgia, New Hampshire, Maryland, Rhode Island, Illinois, Delaware, Virginia, Oregon, Connecticut, South Dakota, New Jersey, Maine, Iowa, West Virginia, District of Columbia*.
• Treading water (13): Missouri, Ohio, Hawaii, New Mexico, Alaska, New York, Vermont, Arkansas, California, Tennessee, Nevada, Colorado, Michigan.
• Expanding (16): South Carolina, Idaho, Texas, Oklahoma, North Carolina, Alabama, Kentucky, Florida, Nebraska, Indiana, Louisiana, North Dakota, Arizona, Pennsylvania, Utah, Wisconsin.

Furthermore, Zandi highlighted that his machine-learning-based leading recession indicator assigns a 49% probability of a downturn within the next year. He pointed out that while upcoming tax reductions and defense spending could bolster growth, their impact won't be felt until the following year. According to Zandi, the most likely scenario is that the economy narrowly avoids a recession.

“The economy will be most vulnerable to recession toward the end of this year and early next year,” Zandi explained. He attributed this vulnerability to the inflationary effects of increased tariffs and stringent immigration policies, which are expected to peak and significantly impact household incomes and consumer spending.

Employment Trends and Indicators

Zandi also emphasized that the economy is susceptible to slipping into a recession with minimal external shocks, such as a selloff in the Treasury bond market, which could drive long-term yields higher. Additionally, he noted that over half of the industries are already reducing their workforce, a trend historically associated with impending recessions.

Recent employment data further supports these concerns. Payrolls increased by only 73,000 last month, falling short of the expected 100,000. Moreover, previous months saw significant downward revisions—May's job growth was adjusted from 144,000 to 19,000, and June's from 147,000 to just 14,000—resulting in an average gain of merely 35,000 over the past three months. Zandi anticipates that future revisions may indicate an actual decline in employment.

“Also telling is that employment is declining in many industries. In the past, if more than half the ≈400 industries in the payroll survey were shedding jobs, we were in a recession,” he stated. “In July, over 53% of industries were cutting jobs, and only health care was adding meaningfully to payrolls.”