Recession odds climb on Wall Street as economy shows cracks beneath the surface
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Federal Reserve Chairman Jerome Powell backpedaled last week when asked whether stagflation poses a threat to the U.S. economy. His successor may face a tougher test as Wall Street forecasters raise expectations for a recession driven in part by the Iran war and the potential for higher prices.
Economists in recent days have raised their risk assessments of a U.S. contraction amid rising uncertainty about geopolitical risks and a labor market that has been strained over the past year.
Moody’s Analytics’ model raised the recession outlook for the next 12 months to 48.6%. Goldman Sachs raised its forecast to 30 percent. Wilmington Trust’s odds are 45%, while EY Parthenon’s odds are 40%, and it has warned that “the odds could rise rapidly in the event of a more prolonged or violent Middle East conflict.”
In normal times, the risk of recession in any 12-month period is around 20%. Therefore, although current estimates are not very precise, they indicate a high risk.
This presents a formidable challenge for policymakers who are asked to balance threats to the labor market against sticky inflation.
“I worry that recession risks are disturbingly high and on the rise,” said Mark Zandi, chief economist at Moody’s Analytics. “Recession is a real threat here.”
War fuels fears
Talks of economic contraction accelerated The war with Iran dragged on.
Almost every recession the United States has seen since the Great Depression was preceded by an oil shock; Except for the Covid epidemic. Prices at the pump rose $1.02 per gallon last month, an increase of 35%. According to AAA.
While economists are still debating the transition impact of high energy, this trend continues.
“The negative consequences of high oil prices appear first and quickly,” Zandi said. “If oil prices stay where they are through Memorial Day, especially through the end of the second quarter, that will push us into a recession.”
Like his fellow forecasters, Zandi said his “core” expectation is that the warring sides will find a diplomatic outlet, oil will flow through the Strait of Hormuz again and the economy can avoid the worst-case scenario.
Of course, most economists are negative and are subject to the old trope of predicting nine of the last five recessions. Markets are also wrong about where the economy is heading. The part of the yield curve (or the spread between various Treasury maturities) most closely watched by the Fed has repeatedly sent false signals of recession for much of the last 3.5 years.
But the threat of a protracted war, pressure on consumers, which accounts for more than two-thirds of all growth, and a labor market that creates almost no jobs in 2025 collectively increase the risk that the expansion could stall.
“This road is getting narrower and it’s getting harder and harder to see the other side,” Zandi said.
Consumers are also pessimistic. Consumer site NerdWallet said: March survey 65 percent of those surveyed showed that they expect a recession in the next 12 months, an increase of 6 points compared to the previous month.
Problems with work
Beyond energy prices, the labor market is also a major pressure point, economists say.
The US economy created only 116,000 jobs in all of 2025 and We lost 92,000 in February. While the unemployment rate remained steady at 4.4 percent, this was largely due to a lack of layoffs rather than a boom in hiring.
Moreover, the labor market is suffering due to the narrow scope of recruitment. Excluding strong gains in health-related fields (more than 700,000 overall), employment outside those fields fell by more than half a million last year.
“I think the inflation risk is much less” [Fed officials] Luke Tilley, chief economist at Wilmington Trust, said:
“We’re taking more people into the future who need more healthcare,” added Dan North, senior U.S. economist at Allianz. “There will be demand for these jobs. However, it is not possible to operate the railway if you are doing it with a single engine.”
Employment is, of course, the main driver of consumer spending, which remains strong despite rising prices and growth concerns.
These twin concerns have spurred talk about stagflation, the combination of rising inflation and slowing growth that plagued the United States in the 1970s and early ’80s. Fed chief Powell rejected that characterization at a press conference following last week’s policy meeting, where the central bank kept its benchmark interest rate in a range of 3.5%-3.75%.
“I always have to point out that this was a period in the 1970s when unemployment was in double digits and inflation was really high,” he said. “That’s not the case right now.”
“This is a very difficult situation, but it’s nothing like what we faced in the 1970s and .. I’m saving stagflation for that period. Maybe that’s just me,” Powell added.
Cracks in the foundation
So the current situation may be a milder stagflation; Although it is not as obvious as the previous incident, it is still a situation that carries risks. Consumer confidence was generally weak and hampered by those at the lower end of the income spectrum, who were hit particularly hard by higher prices.
Wilmington Trust’s Tilley warned that spending was largely supported by rising asset prices and that dynamic may not continue.
“We estimate that spending growth has increased by 20 percent to 25 percent over the last two years, driven by the wealth effect from the stock market,” he said. “If you don’t get that wealth effect increase, then you’re going to lose a lot of the growth.”
Dow since the war began
According to the Atlanta Fed’s report, gross domestic product is on track to grow 2 percent in the first quarter. GDPNow tracker of rolling data. However, this is due to an increase of just 0.7% in the fourth quarter; This is partly a result of the government shutdown. Economists expected the decline in growth in the 4th quarter to turn into an increase in the 1st quarter, but the effects of this seem moderate.
Still, if global leaders can bring an end to the war soon, the economy is again expected to weather the gloomiest forecasts. Stimulus from the One Big Beautiful Bill in 2025 is expected to boost growth, along with lower regulations and an increase in tax returns that could help consumers cope with higher prices. The continuous increase in production is also a factor in favor of the economy.
“There is support underneath,” said North, the Allianz economist. “That makes me really hesitant to use the ‘R’ word. But I definitely think we’ll see a slowdown this year.”
