If New York or California enter a recession, the entire U.S. economy would be next. So how are they doing?

By Greg Robb

As two of the biggest states in the country, their economies ‘may be canaries in the coal mine,’ one economist notes

The economies of California and New York could be proverbial canaries in the coal mine.

New York and California are struggling economically – and if things get worse in those states, they could take the whole U.S. economy down with them.

The two states aren’t doing as poorly as the 22 that are currently in recession, according to a recent study by Mark Zandi, chief economist at Moody’s Analytics.

The implication of Zandi’s research is that the national economy would submerge under the waves if either of these two gigantic state economies were to falter.

If California was a country, its economy would be ranked as the fourth-largest in the world, with a nominal gross domestic product of $4.1 trillion. New York’s would be ranked 11th. But economists who specialize in these two states are worried; they say both economies are suffering from longstanding problems that could become exacerbated by certain events – including the U.S. immigration crackdown, changes to the labor market coming from artificial-intelligence technology, and a stock-market downturn.

“The outlook for the national economy is very uncertain right now,” said Scott Anderson, chief U.S. economist at BMO Capital Markets.

“I do think we’re on shaky ground here,” Anderson added. Since California and New York are two of the biggest states in the country by GDP, “they may be canaries in the coal mine,” he added. “Which way California and New York go may be the way the nation goes.”

California could slip into recession – but that’s not the forecast

Of the two states, California’s economic problems seem more pressing.

“We’re having a bad year – there is not much good news,” said Stephen Levy, director and senior economist at the Center for Continuing Study of the California Economy in Palo Alto, Calif.

The traditional pattern for California’s economy, Levy said, was that when the nation was in recession, California would be hurt worse – but when the U.S. economy grew, California’s economy would grow faster. Yet this has been reversed this year, and California’s economy is growing slower than the U.S. economy as a whole.

“California’s economy isn’t a vibrant job creator anymore. You could almost say California is in a jobs recession,” said Anderson. The state has shed a net 21,000 jobs this year, and the unemployment rate is at 5.5%.

Californians are still spending at a higher rate than the U.S. economy as a whole, which is why the state is listed in Zandi’s study as treading water, Anderson noted.

A prominent forecast from the UCLA Anderson School of Management sees slow growth in California this year, with growth not expected to pick up until 2027. The forecast notes that there is the possibility of a mild contraction in the state’s economy.

The only economic sectors with job growth this year have been healthcare, government and education; these are not high-wage sectors that foster spin-offs and more employment. “So it is possible that what happens in this latter part of the year would lead to a contraction in the output of goods and services,” said Jerry Nicklesburg, senior economist for the UCLA Anderson Forecast and the longtime author of the Forecast’s quarterly California economic report.

Some of California’s problems are related to challenges in the state’s marquee industries. The entertainment sector remains in a funk that started with the 2023 Hollywood writers strike, while AI is roiling the tech sector, with a loss of jobs and low hiring of recent graduates.

But other parts of California’s woes are related to policies coming from the Trump administration. Imports of foreign goods have softened and port traffic has turned down in recent months.

Deportations are hurting industries that employ unauthorized immigrants such as construction, hotels and hospitality, and nondurable-goods manufacturing. Weakness in the construction industry also furthers a housing-affordability crisis in the state.

It is also hard to attract new workers to the state because it is just so unaffordable to buy homes, noted BMO’s Anderson. An influx of foreign workers had ameliorated the problem somewhat, but that has now dried up.

New York is humming along – but experts worry about the future

In contrast to California, New York state’s economy is doing well at the moment, but economists are worried about the future.

“The New York economy is doing a little better than expected three or four months ago, but it’s not rosy,” said Edward Malco, professor of finance at Baruch College’s Zicklin School of Business.

Job growth in New York has picked up this year, and the unemployment rate stood at 4% in August.

Still, “at the macro level, things are not good,” said Carl Schramm, economics professor at Syracuse University. “What are the indications? Just look at the tax rates,” he said. New York ranks last in the Tax Foundation’s 2025 State Tax Competitiveness Index, which measures and compares U.S. states’ tax systems.

In addition, the New York economy is concentrated in finance and real estate, putting the state at risk if either industry suffers. The upswing this summer is likely due to the stronger performance of financial markets, but it highlights that New York is vulnerable to a market downturn, Malco said.

“The basic problem is that the financial sector is doing very well, but we all know it peaks,” he said. “The risk of recession is greater today than before. From my experience, when it is so beautiful that no one can see it is going to be bad, that is when the economy is at its riskiest.”

In addition, Wall Street firms seem to be experimenting with moving out of New York. While 95% of these firms are still in New York, 5% have moved, according to Malco, and they are closely eyeing whether the state adopts taxes that Wall Street considers punitive – like additional taxes on millionaires or on market transactions.

Stepping back, Schramm said there is a steady trend of “outmigration” of New York residents to warmer climates, especially on the east coast of Florida. New York has lost 2 million people in the last decade, he noted.

“You don’t have to have 25% outmigration” to put the state’s economy at risk, Malco said. “You can have 3% outmigration, because they represent 10% of state tax revenue.”

If more New Yorkers leave, that will put pressure on the remaining residents to pay higher tax rates. President Donald Trump has also threatened to pull federal funding from New York City, and New York Gov. Kathy Hochul has already accused the Trump administration of withholding funding from the state.

Though California and New York are some of the country’s biggest and most prominent economies, other states may offer better clues on the direction of the U.S. overall.

Schramm thinks the states to watch are Texas, Florida and Tennessee. Those are the growth states that are now powering the economy, he said.

-Greg Robb

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10-11-25 0900ET

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