‘West is most vulnerable’ if recession hits this year
Different regions of US more at risk or more insulated from various aspects of a potential economic downturn
If the U.S. slips into a mild recession this year, as most economists expect, the entire country will feel it. But some regions would be hit harder than others.
The West, in the crosshairs of the housing and technology slumps, would be most severely hurt, experts say. And the Midwest, which is relatively insulated from both of those forces, probably would be best positioned to ride out a downturn.
The Northeast and South would fight for second and third place on the pain meter, economists say. A sharp banking and finance pullback would be tougher on the Northeast, while a deepening housing slide would take a bigger toll on the South, economists say.
“The West is most vulnerable and most likely to be hit hardest,” says Adam Kamins, regional economist at Moody’s Analytics.
Which US states have the best economy?
To some extent, the regional effects of a 2023 recession may defy recent experience. In the COVID-19 downturn of 2020, Southern and Western states were already leading the U.S. economically as their temperate climates, stunning landscapes and lower living costs drew millions of transplants. The health crisis stoked that trend by encouraging many Americans to work remotely and move to more sparsely populated areas.
By contrast, the coming recession is more likely to feature an unwinding of the pandemic’s excesses – the run-up in housing prices, soaring inflation and stay-at-home technology boom. As a result, the West and South – which benefited from overheating in housing, tech or both – could be socked by a hangover.
What will trigger the next recession?
Keep in mind that any recession almost certainly would be sparked by a Federal Reserve that’s aggressively raising interest rates to tame inflation, a strategy that raises borrowing costs for consumers and businesses across the country.
There will be fewer regional differ
ences than in the COVID-19 collapse or the Great Recession of 2007-09, says Karl Kuykendall, regional economist for S&P Global Market Intelligence.
The COVID-19 slump clobbered dense cities and tourist hubs, while the Great Recession was sparked by a real estate crisis that hammered Sunbelt housing markets.
Also, the next recession, unlike the previous two, is expected to be mild, Kuykendall says, narrowing regional disparities.
Still, more pain will be felt in “regions where you have a concentration of interest-rate-sensitive sectors” such as manufacturing and construction, says Olu Sonolu, a regional economist for Fitch Ratings.
Here’s a look at how different parts of the country may fare in the most likely scenario of a mild recession in 2023, from most to least severely affected:
West
The West already has been on the leading edge of a downturn; tech companies such as Amazon, Meta and Google have announced more than 200,000 layoffs since early 2022.
Technology helped people work and play more from home during the pandemic, igniting a high-tech boom. But as the health crisis eased, Americans largely have resumed normal behaviors outside the home, and tech sales have waned. Tech companies, which hired too many workers during the run-up, are cutting jobs. Kamins of Moody’s expects layoffs to accelerate and spread to other industries, such as marketing companies and restaurants that serve tech firms.
Also, he says, laid-off tech workers are easily finding new jobs, but that will become harder as unemployment rises and the number of job openings shrinks.
The West, especially the Mountain West, also rode the housing boom. Home prices in states such as Utah, Arizona, Colorado and Idaho rose more than 20% annually through last May. California residents and others flocked to the region for lower costs, striking vistas and more space, a trend that accelerated during the pandemic.
But the higher home prices, combined with sharply rising mortgage rates, have made the Mountain West less affordable, and many residents are leaving, Kamins says. Home prices have fallen on a a monthly basis since July, Moody’s figures show. The slide is expected to dampen housing construction and make residents feel less wealthy, which would discourage spending.
Meanwhile, although inflation has eased in California, prices remain high, especially for gas.
Ortega Counseling Center, based in Whittier, California, couldn’t meet employee demands for raises and a gas allowance last year, says owner Hazel Ortega. After many bolted, she decided to hire mostly remote workers, including in Nevada and Atlanta. Eighteen of her 24 employees are based outside California.
“The cost of living outside California is significantly lower, so employees are happy with their wages and we can count on them to stay longer,” Ortega says.
Employment is projected to fall 1% or more this year in California, Colorado and Nevada, compared with 0.8% across the U.S., according to S&P Global Market Intelligence.
Northeast
The Northeast is less vulnerable to a home price correction, economists say. Median home prices increased 8% last year, compared with 13.6% in the South and 10.3% in the West, according to the National Association of Realtors.
It’s also the only region that still hasn’t recovered all the jobs lost early in the pandemic. As more workers return to the office and help revive downtown shops and restaurants, that should help cushion the blow of economic troubles in cities like New York and Boston, Kamins says.
But, he says, a recession also would hobble a region that's already lagging as its residents have moved to lower-cost Sunbelt cities. “It could lead to more permanent scarring” of the economy, Kamins says.
Also, a sharp rise in interest rates would hurt business investment, further pummel stock prices and discourage dealmaking, battering the financial industry. Goldman Sachs has announced several thousand layoffs, and some other big banks are following. More carnage in the financial sector would amplify the economic struggles, especially in New York City, as workers pull back spending,
Kamins says.
New York and Boston are also tech hubs, which would compound the economic fallout in those cities.
Employment is projected to drop 1.1% in New York and 0.9% in Massachusetts this year, compared with the 0.8% national decline, S&P predicts.
South
The South has been at the center of the home price surge, with values up 13.6% last year. That means the area has further to fall than the Northeast in a more severe housing slide, says David Iaia, another S&P regional economist.
The region – especially the Carolinas and Kentucky – also relies heavily on manufacturing, which has been battered recently as Americans shift their purchases from goods to services, Iaia says.
At the same time, COVID-19-related supply chain bottlenecks are finally being resolved, providing a boost to the auto industry in states such as Tennessee and Alabama, Iaia and Kamins say.
They add that the area's energy industry also should benefit from high oil and gasoline prices – notwithstanding the recent easing – which led to record profits last year. That should continue to support hiring and investment in states like Texas and Oklahoma, they say.
Employment is expected to fall 0.7% to 0.8% in the South this year, slightly less than the national average, according to S&P.
Midwest
Like the Northeast, the Midwest has struggled with population loss and a less robust economy.
The area’s many farms also have felt the effects from tumbling prices of commodities such as corn and wheat. And states such as Michigan, Wisconsin and Minnesota have been hurt by the manufacturing downturn.
But Michigan, Ohio and Indiana should benefit significantly as auto supply chain snarls are resolved, Iaia and Kamins say. And the Dakotas should see gains from a healthy energy industry.
Meanwhile, home prices rose just 7.1% last year and so are less susceptible to a crash, Kamins says.
All told, employment in Midwestern states such as Michigan, Minnesota, the Dakotas and Wisconsin is projected to decline 0.3% to 0.7%, a bit less than the national average.