Moody’s chief economist says some states are in recession

Moody's chief economist Mark Zandi warns the U.S. economy is on the "edge of recession," with states representing nearly a third of U.S. GDP already in or at high risk of contraction, and another third merely "treading water," including critical economic hubs like California and New York. He attributes this downturn to high tariffs and restrictive immigration policies, noting that a third of U.S. industries, such as manufacturing and agriculture, are already in recession. This assessment suggests broader economic weakness, with flatlining consumer spending and contracting construction, limiting the Federal Reserve's policy options amid persistent inflation.

Analysis

According to Moody's chief economist Mark Zandi, the U.S. economy is on the "edge of recession," with a granular state-level analysis indicating significant and widespread weakness. States accounting for nearly one-third of U.S. GDP are reportedly in or at high risk of a recession, with another third described as merely "treading water." This slowdown is attributed to the impact of high tariffs on corporate profits and consumer purchasing power, coupled with restrictive immigration policies. Specific areas of concern include the Washington D.C. region, which lost 22,100 federal jobs from January to May, and key industries such as manufacturing and agriculture that are already in contraction. The stability of the national economy is heavily reliant on major states like California (14.5% of U.S. GDP) and New York (7.92% of GDP), which are currently holding steady but not expanding. This precarious situation is compounded by flatlining consumer spending and rising inflation, which severely constrains the Federal Reserve's ability to provide monetary stimulus and rescue the economy from a downturn.

Key Decisions for Investors

• Given the assessment that states representing a third of U.S. GDP are in or near recession, investors should consider reducing exposure to cyclical sectors like manufacturing and consumer discretionary that are most sensitive to an economic downturn.
• Pay close attention to geographic revenue concentration, as companies with significant operations in high-risk states, particularly the Washington D.C. metro area, face headwinds from contracting local economies and federal job cuts.
• With high tariffs cited as a drag on corporate profits and rising inflation limiting the Fed's policy options, investors should prioritize companies with strong pricing power and resilient supply chains to mitigate margin compression risk.