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New Fed research flags growing risk of US recession

NEW YORK, Dec 30 (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 on the way, new research from the St. Louis Federal Reserve Bank- the report said.

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

The St. Louis Fed said in its report that if 26 states have declining activity within their borders, it provides “reasonable confidence” that the nation as a whole will fall into a recession.

Right now, the bank said, as measured by Philadelphia Fed data that tracks the performance of individual states, 27 had declining activity in October. It is enough to point to a looming downturn while standing below the numbers that have been seen ahead of some other recessions. The authors noted that 35 states suffered declines ahead of the short and sharp recession in the spring of 2020, for example.

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

The paper’s authors said unemployment bottoms out and begins to move higher ahead of recessions in a very reliable pattern. When this shift occurs, the unemployment rate signals the beginning of recession in about eight months, the paper said.

The paper acknowledged that their findings are similar to the findings of the Sahm Rule, named after former Fed economist Claudia Sahm, who pioneered efforts to link a rise in the unemployment rate to economic downturns. The San Francisco Fed survey, written by banking economist Thomas Mertens, said the innovation is to make the change in the unemployment rate a forward-looking indicator.

Contrary to the St. Louis Fed state tipping towards a recession forecast, the US unemployment rate has so far held fairly steady, and after a low of 3.5% in September, it remained at 3.7% in both October and November .

The San Francisco Fed newspaper noted that the Fed, in its December forecasts, sees unemployment rising next year amid a campaign of aggressive rate hikes aimed at cooling high inflation. In 2023, the Fed sees unemployment jumping up to 4.6% in a year where it sees only modest levels of overall growth.

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

Tim Duy, chief economist at SGH Macro Advisors, said he believes 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 falling into recession has been fueled by the Fed’s strong anti-inflation actions. Many critics argue that the central bank focuses too much on inflation and not enough on keeping Americans employed. Central bank officials have countered that without a return to price stability, the economy will struggle to meet its full potential.

Also, Federal Reserve Chairman Jerome Powell said at the press conference after the last meeting of the Federal Open Market Committee earlier this month that he did not see the current Fed outlook as recessionary given expectations that growth will remain positive. But he added that much is still uncertain.

“I don’t think anybody knows whether we’re going to have a recession or not, and if we do, whether it’s going to be a deep one or not. It’s just, there’s no telling,” Powell said.

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

Our standards: Thomson Reuters Trust Principles.

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