Over 20 state economies are in or near recession, Moody's finds

Moody's Analytics Chief Economist Mark Zandi reports that 21 U.S. states and the District of Columbia, collectively representing nearly a third of the nation's GDP, are either in recession or at high risk of entering one, including major economies like Illinois, Georgia, and Washington. This widespread state-level economic weakness, even as large states like California and New York are 'treading water' and some Southern states expand, suggests the overall U.S. economy is on the brink of a broader downturn.

Analysis

Moody's Analytics Chief Economist Mark Zandi reports that 21 U.S. states and the District of Columbia, collectively representing nearly a third of the nation's GDP, are either in recession or at high risk of entering one. This widespread state-level economic weakness, encompassing major economies like Illinois (3.85% of U.S. GDP) and Georgia (3.03%), indicates a significant deceleration in regional economic activity. Zandi explicitly states this data suggests the overall U.S. economy is "on the edge of recession."

While a substantial portion of the economy faces contraction risk, other large states like California (14.5% of U.S. GDP) and New York (7.92%) are "treading water," with their stability deemed crucial to avoid a national downturn. Southern states such as Texas (9.41%) and Florida (5.78%) show expansion, though Zandi notes their growth is slowing. This divergence highlights a fragmented economic landscape, with regional strengths potentially offsetting, but not fully negating, broader weaknesses.

The analysis emerges amidst a challenging macroeconomic backdrop, including an ongoing government shutdown that has delayed key economic data releases like the September jobs report and CPI. The Federal Reserve remains concerned about inflation, which is above its 2% target and recently increased due to tariffs, yet cut interest rates in 2025 due to signs of a weakening labor market. This policy dilemma, coupled with the state-level recession risks, underscores heightened uncertainty for the national economic outlook.

Key Decisions for Investors

• Investors should re-evaluate portfolio exposure to states identified as high-risk for recession, particularly those with significant GDP contributions like Illinois and Washington.
• Monitor upcoming economic data, especially the delayed CPI and jobs reports, as their release will provide clearer signals on inflation and labor market health, influencing Fed policy.
• Consider defensive positioning or hedging strategies given the pessimistic economic outlook and fragmented state-level performance, while closely watching for signs of slowing growth even in previously expanding regions.