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New Fed survey signals rising risk of US recession

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By Michael S. Derby

NEW YORK (Reuters) – Just over half of the 50 U.S. states are showing signs of slowing economic activity, breaking a key threshold that often signals a recession is imminent, said new research from the St. Louis Federal Reserve Bank.

That report, released on Wednesday, followed another report from the San Francisco Fed earlier in the week, which also delved into the growing prospect that the US economy could enter a recession at some point in the coming months.

The Fed of St. Louis said in his report that if 26 states see declining activity within their borders, that provides “reasonable confidence” that the country as a whole will slip into a recession.

At the time, the bank said that, as measured by Philadelphia Fed data tracking the performance of individual states, 27 had declining activity in October. That’s enough to point to an imminent slowdown while remaining short of the numbers that were seen before some other recessions. The authors noted that 35 states experienced declines prior to the short, sharp recession seen in spring 2020, for example.

Meanwhile, a San Francisco Fed report released on Tuesday noted that changes in the jobless rate could also signal that a slowdown is underway, in a signal that offers more near-term predictive value than the curve. bond market yield, closely watched.

The study’s authors said the unemployment rate bottoms out and starts to rise before the recession in a highly reliable pattern. When that shift occurs, the jobless rate signals the onset of a recession in about eight months, the paper said.

The paper acknowledged that its findings are similar to those of the Sahm Rule, named after former Fed economist Claudia Sahm, who pioneered work linking rising unemployment to economic downturns. The San Francisco Fed survey, written by the bank’s economist Thomas Mertens, said its innovation is to make the change in the unemployment rate a forward-looking indicator.

Contrary to the state data from the St. Louis, which point to a recessionary outlook, the US unemployment rate has so far remained reasonably stable and, after falling to 3.5% in September, has remained at 3.7% in October and November.

The San Francisco Fed Journal noted that the Fed, from its December forecast, sees the unemployment rate rising next year amid its campaign of aggressive rate hikes aimed at dampening high levels of inflation. In 2023, the Fed sees the unemployment rate jump to 4.6% in a year it sees only modest levels of overall growth.

If the Fed’s prediction comes true, “such a rise would trigger a recession forecast based on the unemployment rate,” the paper said. “Under this view, low unemployment may lead to a greater likelihood of recession when the unemployment rate is expected to rise.”

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

Anxiety over the prospect of the economy slipping into a recession was boosted by the Fed’s forceful actions on inflation. Many critics argue that the central bank is focusing too much on inflation and not enough on keeping Americans in employment. Central bank officials responded that without a return to price stability, the economy will struggle to reach its full potential.

Furthermore, at the press conference following the most recent meeting of the Federal Open Market Committee earlier this month, central bank leader Jerome Powell said that he did not view the current Fed outlook as predicting a recession, as growth expectations will remain positive. But he added that much remains unclear.

“I don’t think anyone knows whether we’re going to have a recession or not, and if we do, whether it’s going to be deep or not. It’s just that you don’t know,” Powell said.

(Reporting by Michael S. Derby; Editing by Dan Burns and Aurora Ellis)