Recession in U.S. becomes increasingly less likely, but odds are highest in West, South

The odds of the U.S. tipping into a recession by mid-2024 have fallen significantly in recent months as economic and job growth have remained sturdy even while inflation has eased.

But some regions of the country are still more likely to slip into a downturn than others.

During the pandemic, the West and South notched the most dramatic economic run-ups, especially in home prices and inflation, and are most vulnerable to a tumble, according to Moody’s Analytics.

While those regions were already attracting residents from other areas because of their favorable climates and lower living costs, the pandemic that began in 2020 amplified those trends by encouraging many Americans to work remotely and move to sparsely populated towns.

“There’s more risk in places that have grown rapidly,” says Moody’s regional economist Adam Kamins. “There’s a little more risk of a bubble forming.”

The Midwest and Northeast, beset by stagnant or declining populations, have expanded more modestly and so are less susceptible to a pullback, he says.

“There’s not as far to fall,” Kamins says.

Should I be worried about a recession in 2023?

Nationally, the chance of a recession – or a sustained decline in economic activity − has dropped to 33% from 50% early this year, Moody’s reckons. Slowing inflation has lowered the chances that the Federal Reserve will raise interest rates further this year in an effort to dampen economic growth and consumer price increases. The risk of a slump also has declined in each region, Kamins says. And any slide is expected to be mild.

Still, “There’s a good chance there will be some (metro areas) uncomfortably close to 50% odds,” Kamins says, pointing to Austin, Texas; Boise, Idaho; Ogden, Utah; and Tampa, Florida.

What was happening during the Great Recession?

And if one region is hit by a downturn, it could ripple to neighboring areas, possibly imperiling the nation, Kamins says. That, he says, is what happened in the Great Recession of 2007-2009 as a housing price crash in the Sunbelt spread across the country. That, however, was a much more severe slump than any the U.S. is likely to experience in the coming months.

Keep in mind too that other U.S. forecasters see a higher risk of recession. Economists broadly say there’s a 48% chance of a downturn in the next 12 months, down from 50% in August and 61% in May, according to the median estimate of those surveyed early this month by Wolters Kluwer Blue Chip Economic Indicators.

By that measure, there’s a better than even chance that more vulnerable regions will suffer a shakeout.

Will 2024 be a good year for the economy?

Not all economists agree, though, that the hottest regions are at the greatest risk. The U.S. economy is projected to expand a meager 1.1% over the next year as aggressive Fed rate hikes start taking a bigger toll, according to S&P Global Market Intelligence.

The West and South should grow a bit more rapidly, reducing the odds that either territory will dip below stall speed, says Karl Kuykendall, regional economist at S&P Global Market Intelligence.

“They’re more vibrant economies,” Kuykendall says, adding that the chances that either area overheats and melts down have dropped since early 2023.

Here’s a look at recession odds for each U.S. region, from highest to lowest, according to Moody’s:

West

Recession odds: 35.2%

From 2020 to mid-2022, the region, especially the Mountain West, experienced the sharpest run-up in home values, with prices rising an average of 20.5% a year, according to Moody’s and S&P Corelogic Case-Shiller Home Price Indices

In Boise, home prices soared 60% during that period as thousands of Americans flocked there as a refuge from the pandemic, and for its natural beauty and vibrant culture.

Yet from mid-2022 to early 2023,  home prices fell 21% in Boise and 4.2% in the West, the most of any region, according to real estate broker Redfin and S&P. Meanwhile, inflation overall has run at  4.3% the past year, well above the national average, according to Moody’s.

The West was also hammered by hundreds of thousands of layoffs by technology companies such as Amazon, Google and Microsoft as the COVID-19-induced stay-at-home tech boom petered out. But that trend largely has played out and most employees who lost jobs quickly found new ones, Kamins and Kuykendall say.

Still, the surge in home values and consumer prices has strained household finances, especially for low- and middle-income residents Moody's Kamins says. That could take a toll on consumer spending and the economy, he says.

Over the past year, growth in jobs and economic output have topped the nation’s and that’s expected to continue over the next 12 months amid a weakening U.S. economy, both Kamins and Kuykendall forecast. They expect the region to grow 1.2% to 1.4% next year.

Yet Kamins sees hazards ahead.

Although home prices have rebounded this year, Kamins says that’s only because of limited housing supplies. He reckons new house construction will provide more inventory and home prices are likely to fall another 9.5% over the next year. That would make homeowners feel less wealthy and further curtail spending, increasing recession risks.

Kuykendall, by contrast, says, “Home prices have bottomed out.” As a result, he says, the chance of a recession has waned.

South

Recession odds: 34.7%

The South’s narrative looks similar to the West, with people flooding into the area during COVID for its temperate climate and low costs. Yet after home prices rose 19.1% annualized from mid-2020 to mid-2022, the South, unlike the West, has seen little pullback in values, S&P and Moody’s figures show.

Moody's Kamins says there’s likely to be a further decline: He projects a 7.4% drop in home prices over the next year.

Meanwhile, he says, inflation of 4.4% the past year was the highest among the four regions as the influx of new residents nudged up prices for goods and services. That’s pressuring household budgets.

“Delinquency rates are starting to rise,” he says.

Mortgage delinquencies in Alabama, Mississippi and Louisiana were among the highest in the nation last year, according to the Consumer Financial Protection Bureau.

Midwest

Recession odds: 32.3%

The area had a more modest rise in home prices and hasn’t been hit with a significant correction, Moody’s and S&P figures show.

Inflation also has been lower at 3.7%. States such as Illinois have grappled with large population losses. The lack of volatility means there’s less chance of a bubble bursting, Kamins says.

Yet the manufacturing stronghold is at risk of wobbling. Factory activity has declined for 10 straight months. That's largely due to rising interest rates that have discouraged large business capital purchases and soft exports to economically struggling countries, Kamins and Kuykendall say.

Manufacturing is expected to recover somewhat, according to Moody’s, but a threatened strike by the United Auto Workers could idle nearly 150,000 employees, many in the Midwest.

Moody’s expects employment to grow just 0.56% over the next year while S&P is looking for job losses.

Northeast

Recession odds: 29%

Like the Midwest, the Northeast has faced a shrinking or stagnant population and a more modest rise in home prices. Inflation overall was 3% the past year, the lowest among the four regions.

“They’ve just been slow and steady for a while and don’t have as far to fall,” Kamins says.

At the same time, higher interest rates pose risks to Wall Street and the financial sector, a major industry that supports thousands of jobs in cities such as New York and Boston.

And while employees are gradually returning to the office, many are still working remotely at least some of the time, leaving central business districts in New York, Boston and Philadelphia diminished compared to their pre-pandemic days, Kuykendall and Kamins say.

Unlike Kamins, Kuykendall says that puts the region at a higher risk of a downturn.