Economists Warn California and New York's Economic Health Could Determine National Recession Risk

What's Happening?

Economists are closely monitoring the economic performance of California and New York, as these states could play a pivotal role in determining whether the U.S. enters a recession. Scott Anderson, chief U.S. economist at BMO Capital Markets, highlighted the importance of these states, describing them as 'canaries in the coal mine' for the national economy. Mark Zandi, chief economist at Moody's Analytics, noted that 21 states and Washington, D.C. are at high risk of recession, based on various economic indicators such as payroll employment and industrial production. Despite GDP growth in almost every state during the second quarter of 2025, concerns persist about fragile economic conditions influenced by tariffs, inflation, and a weakened labor market.

Why It's Important?

The economic trajectories of California and New York are crucial due to their significant contributions to the national economy. If these states experience economic contraction, it could signal a broader national recession. Conversely, if they maintain or accelerate growth, the U.S. economy might avoid a recession. The performance of Wall Street and California's tech sector are key factors in this equation. The ongoing government shutdown has delayed official job growth data, but private data sources suggest a weak labor market, with potential job losses. Higher tariffs and restrictive immigration policies are contributing to uncertainty, affecting labor demand and supply.

What's Next?

The Bureau of Economic Analysis (BEA) is set to release its first estimates for GDP growth in the third quarter later this month. The second quarter saw a 3.8 percent growth, and projections for the third quarter suggest a 1 percent annual growth rate. Economists and policymakers will be watching these figures closely to assess the economic outlook and potential recession risks. Businesses are currently avoiding layoffs, which is crucial in preventing a recession, but continued economic uncertainty could change this dynamic.

Beyond the Headlines

The economic health of California and New York not only impacts the national economy but also reflects broader trends in global economic interdependence. The reliance on these states highlights the concentration of economic power and the potential vulnerabilities in the U.S. economic structure. The situation underscores the importance of diversified economic strategies and the need for policies that support sustainable growth across all states.