Board of Governors of the Federal Reserve System

Assessing Recession Risks with State-Level Data

This note evaluates recession risks at the national and state levels using a state-of-the-art Bayesian Markov-switching model that distinguishes between full-recovery recessions (U-shaped recessions) and those that generate lasting damage, or hysteresis (L-shaped recessions). While states exhibit considerable heterogeneity in their business-cycle experiences, most saw some degree of hysteresis in the past recessions that occurred prior to the COVID pandemic. By contrast, the model classifies the pandemic-induced recession as a full-recovery episode with a low likelihood of hysteresis, reflecting the rapid rebound from the sharp downturn. The model suggests that the risk of a national recession has been low of late, though the state-level data reveal pockets of risk.

DOI: https://doi.org/10.17016/2380-7172.3992