NEW YORK, Dec 30 (Portal) – Just over half of the 50 U.S. states are showing signs of slowing economic activity, breaching a key threshold that often signals an imminent recession, new research from the St. Louis Federal Reserve report bank said.
That report, released on Wednesday, followed another report from the San Francisco Fed earlier in the week, which also looked at the growing prospect that the US economy could slip into recession at some point in the coming months.
The St. Louis Fed said in its report that if 26 states have declining activity within their borders, it provides “reasonable confidence” that the nation as a whole will fall into recession.
For now, the bank said October 27, as measured by data from the Philadelphia Fed, which tracks individual state performance, saw declining activity. That’s enough to signal a looming downturn while trailing numbers seen before some other recessions. The authors noted that, for example, 35 states suffered declines before the short and sharp spring 2020 recession.
Meanwhile, a San Francisco Fed report released on Tuesday found that changes in the unemployment rate can also be a sign of an impending downturn, a signal that offers shorter-term predictive value than the closely watched bond market yield curve.
The paper’s authors said the unemployment rate has bottomed and is beginning to move up in a very reliable pattern ahead of a recession. If that shift happens, the jobless rate will signal the start of a recession in about eight months, the paper said.
The paper acknowledged that its findings are similar to those of the Sahm Rule, named after former Fed economist Claudia Sahm, who pioneered the association of increases in the unemployment rate with economic downturns. The San Francisco Fed study, authored by banking economist Thomas Mertens, said its innovation was making the change in the unemployment rate a forward-looking indicator.
Contrary to data from the US Federal Reserve in St. Louis, which pointed to a recession, the US unemployment rate has been fairly stable so far, and after bottoming out at 3.5% in September, it has held up through October as well as in November at 3.7%.
The San Francisco Fed newspaper noted that the Fed’s December forecast expects the unemployment rate to rise next year as part of its campaign of aggressive rate hikes to cool high inflation levels. In 2023, the Fed sees the unemployment rate rising to 4.6% in a year when it sees only modest overall growth.
If the Fed’s forecast comes true, “such a rise would trigger a recession forecast based on the unemployment rate,” the paper said. “From this perspective, low unemployment may lead to an increased likelihood of a recession if the unemployment rate is expected to rise.”
Tim Duy, chief economist at SGH Macro Advisors, said he believes the economy would likely lose “about two million jobs, which would be a recession like 1991 or 2001” to get what the Fed wants on the inflation front.
Concerns about the prospect of the economy slipping into recession have been fueled by the Fed’s tough policy on inflation. Many critics claim the Fed is too focused on inflation and not enough on keeping Americans busy. Central bank officials have countered that without a return to price stability, the economy will struggle to reach its full potential.
In addition, Central Bank Chairman Jerome Powell said in the press briefing after the Federal Reserve Open Market Committee’s last meeting earlier this month that he does not view the current Fed outlook as a recession forecast as growth expectations will remain positive. But he added, much remains uncertain.
“I don’t think anybody knows if we’re going to have a recession or not, and if we do, if it’s going to be a deep one or not. It’s just, it’s undetectable,” Powell said.
Reporting by Michael S. Derby; Adaptation by Dan Burns and Aurora Ellis
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