22 states are in a recession or close to it, new analysis finds

Mark Zandi of Moody's Analytics reports that 22 U.S. states, collectively representing one-third of the nation's GDP, are either in recession or on the verge of one, primarily due to slowing immigration, increasing tariffs, and federal job cuts. This analysis, based on an index mimicking NBER's recession dating, highlights particular vulnerability in agriculture and manufacturing-reliant states. While the national economy is not yet in a recession, Zandi warns it is "pretty darn close," with the economic performance of large states like New York and California being critical determinants for the overall U.S. economic trajectory.

Analysis

Mark Zandi of Moody's Analytics reports that 22 U.S. states, collectively representing approximately one-third of the national GDP, were either in recession or on the precipice of one as of late August. This localized downturn is primarily driven by a combination of slowing immigration, increasing tariffs, and federal job cuts, according to Zandi's proprietary index which incorporates state-level jobs data, industrial production, personal income, and housing starts. This assessment, though subjective, provides a granular view of economic stress points.
The analysis highlights particular vulnerability in states heavily reliant on agriculture and manufacturing, which are disproportionately affected by tariff increases, such as Iowa and Kansas. States with significant federal employment, like Virginia and Maryland, are also struggling due to job cuts, with Washington D.C. reporting the highest unemployment rate at 6% in August. Conversely, states experiencing robust population growth, notably Texas and Florida, are performing better.

Despite these regional contractions, the national economy is not yet in a recession, though Zandi warns it is "pretty darn close." The economic trajectory of large states like New York and California, currently "treading water" with unemployment rates of 4% and 5.5% respectively, is deemed critical. Their continued buoyancy, partly supported by a soaring stock market benefiting wealthy households, is crucial for preventing a broader national downturn.

Key Decisions for Investors

• Investors should closely monitor state-level economic indicators, particularly in agriculture, manufacturing, and federal employment-heavy regions, given the significant regional economic divergence identified.
• Evaluate portfolio exposure to states identified as being in or near recession, considering potential impacts on local businesses, real estate, and consumer demand.
• Pay close attention to economic data from New York and California, as their performance is deemed critical for the national economic outlook, and consider hedging strategies against potential broader economic deceleration.