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

NEW YORK, Dec 30 (Reuters) – Just over half of the 50 U.S. states are showing signs of slowing economic activity, crossing a key threshold that often signals a recession is looming, new research in the report shows. of the St. Louis Federal Reserve Bank told me.

The report, released Wednesday, followed another San Francisco Fed report released earlier in the week that also addressed the growing prospect that the U.S. economy could slide 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, that offers “reasonable reliance” that the nation as a whole will fall into a recession.

Currently, the bank said that, measured by Philadelphia Fed data tracking the performance of individual states, 27 recorded a decline in activity in October. That’s enough to signal an impending slowdown while remaining below the numbers that have been seen before some other recessions. The authors noted that 35 states suffered declines before the short, sharp recession seen in the spring of 2020, for example.

Meanwhile, a report from the San Francisco Fed, released on Tuesday, observed that evolution of the unemployment rate can also signal that a downturn is underway, in a signal that offers more short-term predictive value than the closely watched bond market yield curve.

The authors of the article stated that the unemployment rate bottoms out and begins to rise before the recession in a very reliable pattern. When this change occurs, the unemployment rate signals the start of a recession in about eight months, according to the newspaper.

The paper acknowledged that its findings are akin to those of the Sahm rule, named after former Fed economist Claudia Sahm, which pioneering work linking a rise in the unemployment rate to economic downturns. The San Francisco Fed research, authored by banking economist Thomas Mertens, said its innovation is to make the change in the jobless rate a forward-looking indicator.

Contrary to state data from the St. Louis Fed that skews towards a recessionary projection, the U.S. unemployment rate has so far remained relatively flat and, after hitting a low of 3.5% in September, it remained at 3.7% in October and November.

The San Francisco Fed document noted that the Fed, according to its December forecast, sees the unemployment rate rising next year as part of its campaign of aggressive rate hikes aimed at cooling high levels of inflation. . In 2023, the Fed sees unemployment rate jumps to 4.6% in a year of only modest levels of overall growth.

If the Fed’s forecast comes true, “such an increase would trigger a recession prediction based on the jobless rate,” the paper said. “According to this view, a low unemployment rate may lead to an increased probability of recession when the unemployment rate is expected to rise.”

Tim Duy, chief economist at SGH Macro Advisors, said he thinks that to achieve what the Fed wants on the inflation front, the economy “would probably lose about two million jobs, which would be a recession like 1991 or 2001”.

Concern over the prospect of the economy sliding into recession has been fueled by the Fed’s aggressive actions against inflation. Many critics argue that the central bank is too focused on inflation and not enough on keeping Americans employed. Central bank officials countered that without a return to price stability, the economy will struggle to reach its full potential.

Moreover, at the press conference following the last meeting of the Federal Open Market Committee earlier this month, central bank leader Jerome Powell said he did not consider the current outlook for the Fed as a recession prediction given that expected growth would remain positive. But he added that much remains uncertain.

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