The odds that the U.S. will enter a recession by mid-2024 have fallen significantly in recent months as economic and job growth remain strong despite easing inflation.
However, some regions of the country remain more likely than others to fall into recession.
According to Moody’s Analytics, the West and South have seen the most dramatic economic rises during the pandemic, particularly in home prices and inflation, and are the most vulnerable to the crash.
These regions were already attracting residents from other regions due to their favorable climate and low cost of living, but the pandemic that began in 2020 forced many Americans to work remotely or move to smaller populations. This trend was further amplified by encouraging people to move to towns.
“Regions that have grown rapidly have more risks,” said Adam Cummins, a regional economist at Moody’s. “There is a little more risk of a bubble forming.”
The Midwest and Northeast have suffered from stagnant or declining populations, but are expanding more slowly and are therefore less susceptible to setbacks, he said.
“It doesn’t really get me down that much,” Cummins said.
Should we be worried about a recession in 2023?
Moody’s estimates that the chance of a national recession, or sustained decline in economic activity, has fallen to 33% from 50% earlier this year. Slowing inflation has made it less likely that the U.S. Federal Reserve will raise interest rates again this year in a bid to rein in economic growth and consumer price increases. Cummins said the risk of recession is also decreasing in each region. And any slide is expected to be gentle.
Still, “there’s a good chance that in some[metropolitan areas]the probability is closer to 50%,” Cummins says, pointing to Austin, Texas. Boise, Idaho. Ogden, Utah. and Tampa, Florida.
What was happening during the Great Recession?
And if one region experiences a recession, it can spread to neighboring regions, putting the nation at risk, Cummins said. That’s what happened during the Great Recession of 2007 to 2009, when home prices in the Sunbelt collapsed and spread across the country, he says. But it was a much deeper recession than anything the U.S. is likely to experience in the coming months.
Note also that other US forecasters also see a higher risk of recession. Economists generally expect there is a 48% chance that the economy will weaken over the next 12 months, according to the median estimate of those surveyed by Wolters Kluwer Blue Chip Economic Indicators earlier this month. This is down from 50% in August and 61% in May.
Considering this, there is a good chance that more vulnerable regions will be culled.
Will 2024 be a good year for the economy?
But not all economists agree that the hottest regions are at the greatest risk. The U.S. economy is expected to grow only 1.1% next year, according to S&P Global Market Intelligence, as the impact of the Federal Reserve’s aggressive rate hikes begins to take more effect.
Karl Kuykendall, regional economist at S&P Global Market Intelligence, said growth should be a little faster in the West and South, making it less likely that either region will fall below stall speed.
“Both economies are more vibrant,” Kuykendall said, adding that the chances of either region overheating and meltdown have diminished since early 2023.
According to Moody’s, here’s a breakdown of the recession probabilities for each U.S. region, from highest to lowest.
Probability of recession: 35.2%
From 2020 to mid-2022, the region, particularly the Mountain West, saw the fastest growth in home prices, with prices increasing an average of 20.5% annually, according to Moody’s and S&P CoreLogic’s Case-Shiller Home Price Index.
In Boise, home prices rose 60% during that period as thousands of Americans flocked to the city for refuge from the pandemic and for its natural beauty and vibrant culture.
But from mid-2022 to early 2023, home prices fell 21% in Boise and 4.2% in the West, the most of any region, according to real estate brokerage Redfin and S&P. Meanwhile, the overall inflation rate was 4.3% last year, well above the national average, according to Moody’s.
Tech companies including Amazon, Google and Microsoft have cut hundreds of thousands of jobs in Western countries as the coronavirus-induced at-home technology boom wanes. But the trend has largely worked, Cummins and Kuykendall say, with most of the employees who lost their jobs quickly finding new ones.
Still, soaring home prices and consumer prices are putting pressure on household budgets, especially those in low- and middle-income brackets, Moody’s Cummins said. That could hurt consumer spending and the economy, he says.
Messrs. Cummins and Kuykendall say employment and economic output growth has outpaced the nation over the past year, and they expect that trend to continue over the next 12 months as the U.S. economy slumps. The region is expected to grow by 1.2-1.4% next year.
But Cummins sees danger ahead.
Home prices have rebounded this year, but that’s only because housing supply is limited, Cummins said. He expects house prices to fall another 9.5% next year as new home construction increases inventory. That would make homeowners feel less well-off, further discouraging spending and increasing the risk of a recession.
By contrast, Kuykendall says, “housing prices have hit rock bottom.” As a result, he says, the likelihood of a recession has decreased.
Probability of recession: 34.7%
The story in the South is similar to that in the West, with people flocking to the region even during the pandemic because of its warm climate and low costs. But unlike the West, the South saw little decline in home prices after home prices rose 19.1% annually from mid-2020 to mid-2022, according to S&P and Moody’s statistics.
Moody’s Cummins says further house price declines are likely, predicting house prices to fall 7.4% over the next 12 months.
Meanwhile, the inflation rate of 4.4% over the past year was the highest among the four regions, as the influx of new residents increased the prices of goods and services, he said. This is putting pressure on household budgets.
“Delinquency rates are starting to go up,” he says.
According to the report, Alabama, Mississippi, and Louisiana had the highest mortgage delinquency rates in the nation last year. Consumer Financial Protection Bureau.
Probability of recession: 32.3%
Moody’s and S&P statistics show that home price growth in this region has been more gradual and hasn’t suffered any major corrections.
The inflation rate has also declined to 3.7%. States such as Illinois are facing significant population declines. Low volatility means the bubble is less likely to burst, Cummins said.
However, the manufacturing stronghold is in danger of being shaken. Factory activity fell for the 10th consecutive month. Cummins and Kuykendall say that’s largely because higher interest rates have slowed large corporate capital purchases and exports to economically challenged countries.
Moody’s said manufacturing is expected to recover somewhat, but about 150,000 workers, mostly in the Midwest, could be out of work due to the threat of a strike by the United Auto Workers union.
Moody’s expects job growth to be only 0.56% over the next year, while S&P expects jobs to decline.
Probability of recession: 29%
Like the Midwest, the Northeast faces a declining or stagnant population and slowly rising home prices. The overall inflation rate last year was 3%, the lowest among the four regions.
“They’ve just been slow and steady for a while and don’t really drop off that much,” Cummins said.
At the same time, rising interest rates pose risks to Wall Street and the financial sector, a key industry that supports thousands of jobs in cities like New York and Boston.
And while employees are gradually returning to offices, many are still working remotely at least part of the time, and central business districts in New York, Boston, and Philadelphia remain smaller than they were before the pandemic. According to Kuykendall and Cummins,
Unlike Cummins, Kuykendall says the region is at increased risk of recession.