- ANALYSIS: Despite strong national figures—3.8% GDP growth and 4.3% unemployment—large parts of the U.S. are effectively in recession, according to Moody’s Analytics. Chief economist Mark Zandi exclusively told Fortune that 22 states are contracting and many lower- and middle-income households are “hanging on by their fingertips,” struggling with debt and slowing wage growth despite steady employment. Private data during the federal shutdown shows weakening consumer confidence, particularly among those earning under $35,000. Zandi warned that if economic softness spreads from smaller, manufacturing-heavy states to giants like California or New York, the national economy could tip into recession.
Everything should feel fine in the economy. Gross domestic product was up a healthy 3.8% in the past quarter, and unemployment has stayed at a steady 4.3%. So why does it seem so tough?
The short answer is: Depending on where you live and who you are, the environment around you is recessionary.
According to analysis from Moody’s Analytics, 22 U.S. states are seeing their economies contract. Meanwhile, just 16 are seeing economic growth, while 13 are classified as “treading water.” That said, the states contributing the most to U.S. GDP—California, Texas, and New York—are all in the clear, pushing the overall growth of the country into the green as a result.
But for those who don’t live in the wealthier states (and indeed, aren’t on the higher end of the income ladder within those regions), things “don’t feel very good,” according to Moody’s chief economist, Mark Zandi.
Zandi told Fortune in an exclusive interview that lower-income households are “hanging on by their fingertips financially.” He explained: “They’ve got a job, so that’s why they’re still able to spend and remain engaged in the economy, but increasingly … the grip feels more tenuous because no one’s getting hired. You can sustain that for a while, but you can’t sustain that forever. If the layoffs do pick up, that lower-middle-income group is gonna get nailed—and they have no options, because they really don’t have much in the way of saving.
“They have debt: They have auto debt, they have student loan debt, they may, if they’re lucky, have a mortgage, but they’re gonna struggle, and their world is going to descend into recession pretty quickly.”
In the absence of federal data during the current government shutdown, private surveys have painted a picture of a weakening consumer. The Conference Board’s U.S. Consumer Confidence Survey, released at the end of September, found that by income cohort, those on the lowest end ($25,000 to $35,000) felt worse about the economy at present than when the survey hit an average low in April this year. Moreover, a little under 20% of respondents said jobs were hard to get, and 25% expected the market to get tougher.
Indeed, Zandi has previously outlined that U.S. fortunes are “tethered” to the prospects of the wealthy as they are the only consumers spending ahead of inflation.
And while job losses and rising unemployment would usually be the hallmark of recession, Zandi said an argument could be made that the lowest earners in America are living in a recessionary environment—regardless of where in the country they live: “They don’t have any assets, they’re in a very tenuous situation, and that feels like a recession and everything except: ‘I’ve got a job.’ The thing that’s becoming more apparent is that wage growth for folks in the bottom part of the distribution is lagging now, too.”
Zandi said everyone, bar those in the top 20% of earners, doesn’t feel “very good” about the economy, and added the margin for error on employment is minute: “The way people perceive their own economy, their own finances, are very consistent with the recession—the difference here is they’re not losing jobs.
“Having said that, we’re at a 4.3% unemployment rate … Even in a recession we got 5% or 5.5%, so we’re talking about a percentage point, which is about 1.5 million people. It’s not a lot of people, right? So you could argue that that’s not a very good litmus test of whether you’re in recession or not.”
Regional breakdown
On a regional level, at the sharpest end of the recession spectrum is the District of Columbia—to be expected, Zandi said, because of this year’s mass federal layoffs and funding cuts, which have now been exacerbated by a government shutdown. These issues are also dragging down the economies of nearby states like Maryland and Virginia.
Other regions tipping into the red have also likely done so because they are home to industries impacted by White House policy, said Zandi: “A bunch of other states rely on industries that are getting hit hard by the tariffs and even the restrictive immigration policy. They’re a manufacturing base, they’re agriculture, transportation, distribution, mining—those would be some of the Midwest states—even Georgia, which was the state that surprised me the most because historically that’s been a stronger state.
“But it does have a very large manufacturing base, a big port, a lot of agriculture, and in the big Atlanta economy it’s seen a very significant weakening and inflows of people, just because I think costs have risen considerably, it’s just not quite as affordable as it was given all the pandemic-related immigration into the state, and the housing market has gone soft.”
One of the most surprising elements of the data is that the recession spread is coast to coast, as opposed to being focused around one region of downturn or another—and with this in mind, Zandi said the wider fate of the American economy lies at either end of the country: California and New York.
“Those two states are treading water. They’re big states, and if they go into the red then that’ll probably take the national economy with them into recession. If they turn up and find their way through into the blue, I think we’ll be able to avoid a downturn,” Zandi said. On the markers he’s watching in either state, he added: “In New York, the thing I would be focused on is the S&P 500 because it’s very wealthy and also the financial services sector is critical to the big New York City economy—if that stumbles, then you know New York’s going in.
“In the case of California, it’s technology and also the S&P 500, because that goes to wealth and it goes to what’s driving the caps among those AI companies that are really booming.”
