Alert upgrade! Goldman Sachs and Moody's collectively raise the risk of a US economic contraction, with the recession probability soaring to 48.6%

Ask AI · How a Spike in Oil Prices Could Signal an Impending U.S. Economic Recession?

The U.S. economy is facing multiple layers of pressure and overlapping shocks. With the conflict in the Middle East continuing, oil prices surging sharply, and structural weakness in the labor market layered on top, major Wall Street institutions have recently raised their estimates for the probability of a U.S. economic recession; some forecasts are now nearing 50%.

On March 25, according to CNBC, a model from Moody’s Analytics shows that the probability of the U.S. falling into a recession within the next 12 months has risen to 48.6%; Goldman Sachs raised its forecast to 30%; Wilmington Trust gives a 45% probability; EY Parthenon estimates it at 40% and warns that if the Middle East conflict further expands or lasts longer, this probability could rise rapidly. By contrast, under normal circumstances, the baseline probability of a recession occurring within any 12-month period is about 20%.

Federal Reserve Chair Powell last week, at a press conference following a policy meeting, rejected the characterization of “stagflation” and kept the benchmark interest rate unchanged in the 3.5% to 3.75% range. However, as inflation pressure and downside risks to the job market rise in tandem, the policy makers’ dilemma is intensifying, and market concerns about the economic outlook are also continuing to spread.

War Shock: A Spike in Oil Prices Becomes the Most Direct Trigger for a Recession

The continued Middle East conflict is the core driver behind the warming recession expectations this time. Historical data show that since the Great Depression, almost every U.S. economic recession has been accompanied by an oil-price shock, except for the COVID-19 pandemic.

According to AAA data, over the past month, oil prices have risen by $1.02 per gallon, a gain of 35%. Mark Zandi, Chief Economist at Moody’s Analytics, said, “The negative impact of higher oil prices comes in fast and hard. If oil prices stay at the level around Memorial Day (the last Monday in May each year), or even throughout the entire second quarter, it will push us into a recession.”

Zandi also noted that his “baseline scenario” is still one in which the two sides find a diplomatic way out, the Strait of Hormuz restores oil flows, and the economy can avoid the worst outcome. But he admitted, “That corridor is getting narrower and narrower, and it’s getting harder and harder to see what’s at the other end.”

Consumer confidence is also being clearly hit. A NerdWallet March survey shows that 65% of respondents expect a recession to occur within the next 12 months, up 6 percentage points from the previous month.

Job Market: Structural Hidden Risks Are More Worrisome Than the Surface Data

In addition to energy prices, the deeper cracks in the labor market are another major area of concern for economists.

Data show that in 2025, the U.S. economy added only 116,000 jobs for the full year, and in February it saw a net decrease of 92,000 jobs. Although the unemployment rate remained at 4.4%, this is mainly because layoffs declined rather than because hiring expanded.

What is even more worrisome is the structural imbalance in job growth. Over the past year, job growth in healthcare-related fields added more than 700,000 jobs; after excluding that segment, jobs in other areas fell by a combined total of more than 500,000.

Luke Tilley, Chief Economist at Wilmington Trust, said, “I believe inflation risks are far lower than what Fed officials think, while downside risks to the labor market have been underestimated.” Dan North, senior U.S. economist at Allianz, also noted, “Relying on a single engine to power everything is absolutely not a sustainable approach.”

Employment is the core support for consumer spending, and consumer spending accounts for more than two-thirds of U.S. economic growth. Continued weakness in the labor market will directly threaten the foundation of economic expansion.

Consumption and Assets: A Retreat in the Wealth Effect May Further Weigh on Growth

Another concern for the current economy is that the resilience of consumer spending partly depends on a wealth effect brought by rising asset prices, and this support is starting to waver.

Tilley at Wilmington Trust estimates that over the past two years, 20% to 25% of consumer growth has come from the wealth effect created by gains in the stock market. However, since the outbreak of the conflict, the Dow Jones Industrial Average has fallen by more than 5% in total, and consumption willingness and confidence among high-income groups have come under pressure as a result.

From the macro data perspective, the GDPNow model from the Federal Reserve Bank of Atlanta suggests that U.S. economic growth in the first quarter could reach 2%, but that is achieved on top of a low base: the fourth quarter grew by only 0.7%. Much of the weakness in the fourth quarter came from the drag of a government shutdown. Economists originally expected the drag effect to rebound in the first quarter, but currently the rebound appears to be quite limited.

Powell last week clearly rejected the use of the term “stagflation,” saying the current situation cannot be compared with the 1970s scenario of “double-digit unemployment and extremely high inflation.” But some economists believe the current environment could be described as “mild stagflation”—even if it is not as severe as then, the challenges it poses for growth and policy should not be ignored.

Potential Cushion: If the War Ends, the Economy May Still Have Support

Despite rising risks, many economists still believe the U.S. economy has not reached the brink, noting that if geopolitical conditions ease, there is room for the economy to recover.

The “Big and Beautiful” bill passed in 2025 is expected to stimulate growth by reducing regulatory burdens, boosting tax rebates, and other measures, providing consumers with some cushioning as they deal with high prices. Continued rising productivity is also seen as a favorable factor for the economy.

Allianz economist North said, “There is still support under the economic floor, which makes me very unwilling to use the word ‘recession.’ But I do think that this year we are experiencing a slowdown.”