Why the risk of US recession is on the rise, according to Fed research

The risk of a nationwide recession is rising in states across the US, according to new research released by the Federal Reserve this week.

A total of 27 US states are showing signs of faltering economic activity, according to researchers at the St. Louis Fed.

The agency’s report cited data tracked in the Philadelphia Fed’s state coincident index, which uses four variables tied to the labor market, productivity and inflation to measure economic conditions by state.

“In sum, a threshold estimate based on this analysis shows that 26 states need to have negative growth in the SCI to have reasonable confidence that the national economy entered into a recession,” St. Louis Fed researchers said in the report, which did not identify the faltering states.

The St. Louis Fed researchers noted that an average of 26 states displayed negative growth during the last six recessions dating back to 1980.

The report could mark another reason for mounting anxiety among investors that the US economy has toppled into a recession following a series of sharp Federal Reserve interest rate hikes. The central bank’s critics argue that its actions — aimed at taming inflation — are too extreme.

At present, conditions are slightly better than they were when the US economy plunged into recession at the start of the COVID pandemic. In March 2020, 35 states went negative in the state coincident index, though the economy rebounded to growth in short order.

The report stated the Great Recession is an “outlier” compared to other recent economic downturns. Just nine states showed negative growth in January 2008, according to the St. Louis Fed.

“It was not until the failure of Lehman Brothers in September 2008, which triggered a sharp decline in equity prices and an economy-wide plunge in economic activity, that most economists viewed a recession as highly likely. By October 2008, 47 states registered negative SCI growth,” the researchers said.

The researchers also noted that some recessions “were more nationwide than others.”

“All states experienced recession conditions at some point during the 2007-09 and the 2020 recessions, while only about two-thirds of the states experienced negative growth during the 1990-91 recession,” they said.

Earlier this month, Fed Chair Jerome Powell said he still saw a path for the economy to achieve a “soft landing” and avoid a recession — though he acknowledged the future was uncertain.

“I don’t think anyone knows whether we’re going to have a recession or not and, if we do, whether it’s going to be a deep one or not. It’s just, it’s not knowable,” Powell said.

The Fed has signaled more interest rate hikes are on tap in 2023, albeit at a slower pace than the abnormally large increases seen this year.

With Post wires