"U.S. Economy Splits: A Third in Crisis, Another in Limbo"

A third of the U.S. economy is already in a recession or at high risk of slipping into one, with another third stagnating, according to Mark Zandi, chief economist at Moody’s Analytics. This assessment, based on state-level economic data and industry employment trends, highlights growing concerns about the trajectory of the national economy. Zandi emphasized that states accounting for nearly a third of U.S. GDP are already in a downturn or facing significant risks. Another third is experiencing stagnation, while the final third remains in expansion. States in the recession or high-risk category include major contributors such as Virginia, New Jersey, Massachusetts, and the District of Columbia, while New York and California remain relatively stable, though their growth is slowing. The uneven economic landscape reflects regional disparities in labor markets, policy impacts, and consumer activity. Zandi noted that the broader Washington, D.C. area is particularly vulnerable due to government job cuts, which have had a significant impact on the local economy [1].

The warning follows earlier forecasts that placed the probability of a recession within the next 12 months at 49%, as calculated by Moody’s machine-learning-based leading recession indicator. This outlook is grounded in a combination of factors, including slowing payroll growth and the potential inflationary effects of increased tariffs and restrictive immigration policies. Zandi noted that more than half of the approximately 400 industries tracked in the payroll survey were shedding jobs in July, a pattern historically associated with recessions. Payroll gains have also been revised downward in recent months, with the average three-month gain now at just 35,000, far below previous expectations. The health care sector remains an exception, with meaningful job creation, but Zandi warned that continued job losses across industries could signal an impending downturn [1].

Zandi also highlighted the risks posed by the timing and magnitude of the inflationary impact from Trump’s policies. He forecasted that the economy will be most vulnerable to a recession late this year and early next year, when the effects of higher tariffs and immigration restrictions are expected to peak. This period could see real household incomes decline and consumer spending weaken, further straining economic growth. The Federal Reserve, which has signaled a potential rate-cutting cycle, is expected to play a critical role in mitigating the risk of recession. However, Zandi warned that external pressures, including political influence on monetary policy and investor skepticism over U.S. governance, could exacerbate volatility in the Treasury bond market. A selloff in bonds, he noted, could drive long-term yields higher and intensify financial stress [2].

The uneven regional performance raises questions about the overall resilience of the U.S. economy. While southern states and some Sun Belt regions continue to expand, their growth is slowing. The Atlanta Fed’s GDP tracker currently points to continued nationwide growth, albeit at a decelerated pace, with projections for 2.3% growth in the third quarter compared to 3% in the second quarter. However, Zandi emphasized that the U.S. economy is “on the precipice of a recession,” with only a narrow margin of safety. The potential for a recession is further heightened by the combination of fiscal pressures, including large budget deficits and rising interest costs, and the uncertainty surrounding the timing and effectiveness of policy responses [1].

Despite the risks, Zandi noted that tax cuts and increased defense spending could offer some support for economic growth in the coming year. However, these benefits are unlikely to materialize quickly and may not be sufficient to counteract the negative effects of inflation and labor market weakness. The Federal Reserve’s ability to respond with rate cuts will be crucial in preventing a downturn, but Zandi stressed that the economy is “most vulnerable to recession toward the end of this year and early next year,” when the inflationary effects of current policies are expected to peak [2].

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[1] A third of the U.S. economy is already in a recession or at ... (https://fortune.com/2025/08/25/recession-warning-economic-outlook-states-high-risk-stagnating-expanding/)

[2] U.S. will be most vulnerable to a recession late this year ... (https://fortune.com/2025/08/22/recession-warning-economic-outlook-trump-tariffs-inflation-immigration-crackdown-zandi/)