22 states close to recession are changing the near-term economic picture for markets. Mark Zandi of Moody’s Analytics finds 22 states either contracting or on the brink, representing about a third of U.S. GDP. That matters now because some federal data may go dark during the government shutdown and because Treasury Secretary Scott Bessent spoke at the Fed today. Short term, markets will parse pockets of weakness and Fed optics. Long term, the mix of tariffs, immigration limits and federal job cuts could slow growth in agriculture and manufacturing hubs. Globally, weaker U.S. regional demand could weigh on Europe, Asia and emerging markets that sell goods and materials to those states.
State-level weakness and what it means for the national economy
Mark Zandi built a state-level index using jobs, modeled industrial output, income and housing starts to mimic how the National Bureau of Economic Research judges cycles. His ranking shows 22 states in contraction or very near it. Those states stretch from Washington to Maine and include farming and factory centers. Together they account for roughly one third of U.S. economic output.
The drivers are concrete. Tariff increases hit manufacturing and agricultural exports. A tighter immigration stance has trimmed labor supply in key markets. Federal hiring cuts are compressing payrolls in areas that rely on government work. That combination can depress payrolls while headline national unemployment stays low. For example, Washington, D.C. logged a 6.0% jobless rate in August while the national rate sat at 4.3%.
Some states show odd mixes of signals. Iowa appears on Zandi’s contraction list even though its August unemployment rate was 3.8%. That shows how sectoral stress can exist even with low overall joblessness. California is treading water with a 5.5% jobless rate and a stock market that is still buoying wealthy households. New York sits near a turning point with unemployment at 4.0% and outsized exposure to financial and tech wealth effects. If those two large state economies weaken, Zandi warns the national picture could tilt downward.
How markets interpret regional slowdowns
Regional recessions matter for markets through demand and credit channels. States tied to agriculture and manufacturing can cut orders for intermediate goods, lowering revenues for firms in other states and overseas suppliers. That reduces corporate earnings momentum and can pressure industrial stocks and commodity prices. At the same time, localized job losses raise loan delinquencies for lenders concentrated in those regions, adding strain to smaller banks and community lenders.
Equity markets can mask that pain. A soaring stock market concentrates gains in wealthier households who live in high-capital states like California and New York. That keeps consumer spending stable in high-income pockets even while other regions slow. For global investors, falling regional U.S. demand can reduce exports from Europe and Asia, squeeze emerging market commodity producers and change currency flows toward perceived safe havens.
Bessent at the Fed and policy optics for traders
Treasury Secretary Scott Bessent spoke today at a Federal Reserve conference on community banking. He praised the administration’s economic agenda and discussed deregulation, manufacturing onshoring and crypto innovation. His appearance at a Fed event is notable given the traditional emphasis on separation between the Treasury and the central bank.
Fed governor Michelle Bowman moderated the session and is reported to be on the shortlist to lead the Federal Reserve. That connection matters because the chair selection affects regulatory priorities and market expectations for future rules. Bessent said the federal deficit as a share of GDP fell to about 6% in the fiscal year ending Sept. 30 from 6.4% the previous year, citing Congressional Budget Office estimates. His comments drew applause from community bankers who worry that post-crisis rules tilt against smaller lenders.
Bessent also contrasted big banks with community banks, noting that multinational firms will build ecosystems where larger banks might not serve Main Street. He singled out JPMorgan when speaking about that dynamic, saying JPMorgan is not interested in the ecosystem. That name appears here as JPMorgan (NYSE:JPM). For market participants, the debate over regulatory relief and the health of community banks matters for regional credit spreads and for the broader banking sector’s performance in the coming sessions.
Trading session preview: what investors will watch
With some federal data at risk of delay during the shutdown, traders will lean on state-level signals and Federal Reserve event takeaways to set near-term positioning. The Zandi findings will sharpen focus on regional exposure within portfolios. Equity traders will weigh concentration risk in large cap winners in New York and California against weakness in industrial and agricultural names that serve the 22 flagged states.
Fixed income desks will watch whether talk of shrinking deficits and deregulatory agendas shifts Treasury supply and yield curves. The CBO signal of a slightly smaller deficit as a share of GDP may ease some pressure on long-term yields, but any hint that regional slowdowns accelerate could push investors toward safety. Bank credit desks will monitor community bank guidance and any comments from Fed speakers about supervisory priorities. That will influence spreads on smaller bank bonds and prices for regional bank equities.
Outside the United States, investors will assess how softer regional demand affects trade partners. Industrial exporters in Europe and Asia that sell machinery and parts to U.S. manufacturers will be sensitive to any signs that orders are falling. Commodity markets can react if agricultural demand from the affected states weakens. Emerging market risk premia could adjust if global growth assumptions change.
In practical terms for the next session, watch for trading flows into defensive sectors if regional recession risk headlines dominate, and keep an eye on bank names that derive substantial revenue from community lending footprints. Listen for follow-up remarks from Treasury or Fed officials that clarify the committee dynamics around Fed leadership and regulatory shifts. Finally, track any data releases that continue on schedule and be ready for gaps where federal series are delayed.
The coming session will be about parsing concentrated economic weakness, gauging regulatory signals from Washington, and adjusting to a moment where national averages obscure regional pain. Markets will react to both the macro math of a third of GDP under pressure and to the optics of Treasury and Fed officials discussing rules, deficits and community finance in the same room.
