New Fed research flags rising risk of U.S. recession

NEW YORK, Dec 30 (Reuters) – More than half of the 50 U.S. states are showing signs of slowing economic activity, crossing a key threshold that usually signals a recession is imminent, new research from the St. Louis Federal Reserve Bank said.

That report, released Wednesday, followed a report from the San Francisco Fed from earlier in the week that also noted rising hopes that the U.S. economy could slip into recession at some point in coming months.

The St. Louis Fed said in its report that if the 26 states have fallen activity within their borders, that offers “reasonable confidence” that the country as a whole will fall into a recession.

Currently, the bank says that according to the Philadelphia Fed data that tracks the performance of individual states, 27 have a decrease in activity in October. That’s enough to point to a looming improvement while standing short of numbers seen ahead of other recessions. The authors note that 35 states suffered declines before the short and sharp recession seen in the spring of 2020, for example.

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Meanwhile, a report by the San Francisco Fed, released on Tuesday, noted that changes in the unemployment rate could also signal that a slowdown is on the way, in a signal that offers more near-term predictive value than the closely watched yield curve of the bond market.

The authors of the paper said that the unemployment rate is low and began to move higher ahead of the recession in a reliable pattern. If this shift occurs the unemployment rate signals the start of a recession in about eight months, the paper said.

The paper acknowledges that its findings are similar to the Sahm Rule, named for former Fed economist Claudia Sahm, who pioneered work linking rising unemployment rates to economic downturns. The San Francisco Fed research, written by the bank’s economist Thomas Mertens, says that its innovation is to make the change in the unemployment rate a forward-looking indicator.

Unlike the data in the state of St. Louis Fed pointing to a recession projection, the US unemployment rate has so far remained stable, and after falling to 3.5% in September, it remained at 3.7% in October and November.

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The San Francisco Fed paper said that the Fed, in its December forecasts, sees unemployment rising next year amid a campaign of aggressive rate hikes aimed at cooling high levels of inflation. In 2023, the Fed sees the unemployment rate jumping up to 4.6% in a year that sees only modest levels of overall growth.

If the Fed’s prediction comes true, “such an increase would trigger a recessionary forecast based on the unemployment rate,” the newspaper said. “Under this view, low unemployment may lead to a high probability of recession if the unemployment rate is expected to rise.”

Tim Duy, chief economist at SGH Macro Advisors, said he believes that in order to meet the Fed’s goals on the inflation front, the economy would likely “lose about two million jobs, which would be a recession.” like 1991 or 2001.”

The concern over the prospect of the economy falling into recession is due to the strong action of the Fed on inflation. Many critics argue that the central bank focuses too much on inflation and not enough on keeping Americans working. Central bank officials argue that without a return to price stability, the economy will struggle to reach its full potential.

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In addition, in the press conference after the most recent meeting of the Federal Open Market Committee earlier this month, the leader of the central bank Jerome Powell said that he did not look at the current view of the Fed as a recession prediction because expected growth will remain positive. But he added that many remain 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 deep or not. It’s just, it’s never known,” Powell said.

Reporting by Michael S. Derby; Editing by Dan Burns and Aurora Ellis

Our Standards: The Thomson Reuters Trust Principles.

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