Moody's Economist Warns of Recession Risk Affecting One-Third of U.S. Economy

What's Happening?

Moody's Analytics chief economist Mark Zandi has issued a warning that nearly a third of the U.S. economy is either already in a recession or at high risk of entering one. Zandi's analysis, based on various datasets, indicates that states accounting for a significant portion of U.S. GDP are experiencing economic downturns. He highlighted that while some states are still expanding, others are stagnating. The broader D.C. area is notably affected due to government job cuts, while Southern states show strong but slowing growth. Zandi's assessment comes as the Atlanta Fed's GDP tracker predicts a deceleration in nationwide growth, with expectations of a drop from 3% in the second quarter to 2.3% in the third quarter.

Why It's Important?

The warning from Zandi underscores the fragility of the U.S. economy, with potential implications for national economic stability. States like California and New York, which are crucial for the overall economic health, are currently stable, but their future performance is vital to prevent a broader downturn. The risk of recession is compounded by factors such as inflation fallout from higher tariffs and restrictive immigration policies, which could impact household incomes and consumer spending. Additionally, the shedding of jobs in over half of the industries signals a troubling trend that has historically preceded recessions.

What's Next?

Zandi predicts that the economy will be most vulnerable to recession towards the end of this year and early next year. He suggests that tax cuts and increased government spending on defense could bolster growth, but these measures are unlikely to take effect until next year. The potential for a selloff in the Treasury bond market, leading to soaring long-term yields, could further exacerbate the economic situation. Monitoring employment trends and industry performance will be crucial in assessing the likelihood of a recession.

Beyond the Headlines

The economic warning highlights deeper issues such as the impact of government policies on economic performance and the role of consumer spending in driving growth. The reliance on machine-learning-based indicators for economic forecasting also points to the increasing importance of technology in economic analysis. The potential for a recession raises ethical questions about the balance between economic growth and social welfare, particularly in light of job cuts and income disparities.