New Fed Research Highlights Risk Of US Recession

The St. Louis Federal Reserve Bank conducted new research, which revealed that almost half of the 50 states in the United States are showing signs of slowing economic activity.

They have breached a key threshold, which is known to signal a coming recession. Released on Wednesday, the report came after the San Francisco Fed had already published one earlier this week.

The other report had also exploring the rising chances of the US economy sliding into a recession in the next few months.

The St. Louis report

According to the St. Louis Fed, if the activity is declining in 26 states, then it can be said with reasonable confidence that the country will fall into a recession as a whole.

Data from Philadelphia Fed tracked the performance of an economic activity in individual states and found that there were a total of 27 states that had seen a decline in activity in the month of October.

This is enough to indicate that a downturn is coming, but it is still short of the numbers that typically precede a recession.

For instance, the authors of the report noted that 35 states had seen declines before the sharp and short recession that happened in the spring of 2020.

The San Francisco report

On Tuesday, the San Francisco Fed released a report, which observed that one of the signals of a downturn was changes in the unemployment rate.

This particular signal can offer a predictive value in the near term, while the yield curve of the bond market may not be so accurate.

The authors of the paper said that the unemployment rate has a very reliable pattern because it bottoms out first and starts moving higher before a recession.

When this change happens, the unemployment rate is usually signaling the beginning of a recession, which usually happens in eight months.

More details

The paper further acknowledged that their findings were quite similar to the Sahm Rule, which is named for Claudia Sahm, a former economist for the Fed.

She pioneered the work that connected economic downturns to an increase in the jobless rate. While the data of St. Louis indicates that a recession is coming, the US jobless rate has maintained its stability so far.

It had bottomed out in September when it reached 3.5% but has been holding onto 3.7% in October and November alike.

The paper from the San Francisco Fed noted that the unemployment rate is expected to rise in the next year, as per a December forecast.

This is because of the aggressive interest rate hikes carried out by the Fed, which have been aimed at tamping down the red-hot inflation.

According to the Fed, they expect the jobless rate to rise to 4.6% in 2023, while overall growth will be more modest.

The paper said that if their prediction materializes, then it could result in a recession based on the unemployment rate.

Experts have also said that the Fed will only be able to achieve its inflation goals when around two million jobs are cut down, which means a recession is very likely.