These 2 states will decide if the U.S. slips right into a recession whereas yet one more enters the hazard zone, prime economist says

In social media posts on Wednesday, he reiterated his warning that states representing nearly one-third of nationwide GDP are already in a recession or at high risk of one. Another third is “treading water,” while the rest are still growing but suffering from less momentum.

While his latest assessment largely echoes what he said over the summer and earlier this month, Zandi moved the industrial bellwether state of Michigan from the “treading water” list to the “recessionary” one.

That’s as President Donald Trump’s tariffs continue to weigh on the automakers that power the state’s economy. While General Motors and Ford reported upbeat third-quarter earnings this past week, they still see billions of dollars in tariff-related costs.

Meanwhile, supply-chain disruptions—including China’s curbs on rare-earth exports that came in retaliation to Trump’s trade war—have also hit production.

“This state-level picture mirrors the national trend: the U.S. economy is not in recession, but it is struggling to avoid one,” Zandi wrote. “This is evident in the job market, as payroll job growth has come to a virtual standstill, and likely will look even weaker after all the data revisions are in.”

Construction, manufacturing, technology, finance, government, and professional services are shedding jobs, he added, while just a few sectors, namely healthcare and hospitality, are still adding to payrolls.

Earlier this month, he sounded the alarm on the labor market, saying it’s weak and getting weaker as private-sector datasets indicate there was essentially no job growth in September.

Here’s how the states and one federal district(*) break down:

• Recession/high risk (23): Wyoming, Montana, Minnesota, Mississippi, Kansas, Massachusetts, Washington, Georgia, New Hampshire, Maryland, Rhode Island, Illinois, Delaware, Virginia, Oregon, Connecticut, South Dakota, New Jersey, Maine, lowa, West Virginia, Michigan, District of Columbia*.
• Treading water (12): Missouri, Ohio, Hawaii, New Mexico, Alaska, New York, Vermont, Arkansas, California, Tennessee, Nevada, Colorado.
• Expanding (16): South Carolina, Idaho, Texas, Oklahoma, North Carolina, Alabama, Kentucky, Florida, Nebraska, Indiana, Louisiana, North Dakota, Arizona, Pennsylvania, Utah, Wisconsin.

Moody’s Analytics

For now, economic heavyweights California and New York are treading water but could easily tip the scales. The Golden State alone accounts for a whopping 14.5% share of U.S. GDP, while the Empire State accounts for nearly 8%.

Both face opposing crosscurrents that may ultimately determine how the business cycle unfolds, Zandi pointed out.

“Whether the national economy suffers a downturn appears to rest on the big California and New York economies. Neither economy is in recession, but both are struggling to gain traction,” he explained. “De-globalization, including the trade war and highly restrictive immigration policy, is a headwind to growth, but artificial intelligence and the boost it is providing to investment and the stock market, household wealth, and spending is a tailwind to growth.”

To be sure, the overall economy has been expanding at a robust clip. The Atlanta Fed’s GDP tracker shows third-quarter growth is pointing toward 3.9%, which would actually mark an acceleration from 3.8% growth in the second quarter.

At the same time, most state-level data still doesn’t suggest a spike in layoffs, continuing a no-fire, no-hire environment.

And while the government shutdown has put several key economic indicators on hold, the Labor Department released the consumer price index for September, which ticked higher but came in below forecasts.

That raised the odds for more rate cuts from the Federal Reserve later this year, delivering another boost to the economy.

But Diane Swonk, chief economist at KPMG, warned Friday that the economy looks better than it feels and noted inflation is still creeping higher, albeit at a slower-than-expected pace.

She expects the economy to slow “dramatically” in the fourth quarter, a turn that was already coming before the shutdown drained 750,000 federal paychecks from the economy. Consumer stress, rising delinquencies, and tariff pass-throughs will all collide with a fragile labor market and weaker retail landscape. 

“We’re going into a very difficult holiday season,” Swonk predicted.