The U.S. economy is confronting a convergence of multiple pressures. As the Middle East conflict persists and oil prices surge sharply, combined with structural weaknesses in the labor market, major Wall Street institutions have recently significantly increased their projections for the probability of a U.S. recession, with some forecasts approaching 50%.
According to a CNBC report on March 25, a model from Moody's Analytics indicates that the probability of the U.S. entering a recession within the next 12 months has risen to 48.6%. Goldman Sachs has raised its forecast to 30%, while Wilmington Trust assigns a 45% probability. EY Parthenon estimates the chance at 40% and warns that this probability could increase rapidly if the Middle East conflict expands or prolongs. In contrast, the baseline probability of a recession occurring in any given 12-month period under normal circumstances is approximately 20%.
Last week, following a policy meeting, Federal Reserve Chair Jerome Powell dismissed characterizations of "stagflation" and maintained the benchmark interest rate within the range of 3.5% to 3.75%. However, as inflationary pressures and downside risks in the job market rise simultaneously, policymakers face an intensifying dilemma, and market anxieties regarding the economic outlook continue to spread.
The ongoing Middle East conflict is a central driver behind the heightened recession expectations. Historical data show that, aside from the COVID-19 pandemic, nearly every U.S. recession since the Great Depression has been preceded by an oil price shock.
According to AAA data, gasoline prices have increased by $1.02 per gallon over the past month, a rise of 35%. Mark Zandi, Chief Economist at Moody's Analytics, stated, "The negative impact of rising oil prices comes quickly and fiercely. If oil prices remain at current levels around Memorial Day and throughout the second quarter, it will push us into a recession."
Zandi also noted that his "baseline scenario" still involves the warring parties finding a diplomatic solution, restoring oil flow through the Strait of Hormuz, and the economy avoiding the worst outcome. However, he admitted, "That pathway is getting narrower and harder to see the other side of."
Consumer confidence has also been noticeably impacted. A March survey by NerdWallet showed that 65% of respondents expect a recession within the next 12 months, an increase of 6 percentage points from the previous month.
Beyond energy prices, deep-seated cracks in the labor market are another major concern for economists. Data shows that the U.S. economy added only 116,000 jobs for the entirety of 2025, with a net loss of 92,000 jobs in February alone. Although the unemployment rate held steady at 4.4%, this is primarily due to reduced layoffs rather than expanded hiring.
More alarmingly is the structural imbalance in job growth. Over the past year, the healthcare sector added over 700,000 jobs, but when this sector is excluded, all other sectors combined saw a net reduction of over 500,000 jobs.
Luke Tilley, Chief Economist at Wilmington Trust, said, "I believe inflation risks are far lower than Fed officials judge, while downside risks in the labor market are underestimated." Dan North, Senior U.S. Economist at Allianz, also pointed out, "Relying on a single engine is by no means a sustainable path." Employment is a core support for consumer spending, which accounts for over two-thirds of U.S. economic growth. Persistent weakness in the labor market directly threatens the foundation of economic expansion.
Another current economic concern is that the resilience of consumer spending partly relies on the wealth effect generated by rising asset prices, a support that is now wavering. Wilmington Trust's Tilley estimates that 20% to 25% of consumption growth over the past two years came from the wealth effect of stock market gains. However, since the conflict began, the Dow Jones Industrial Average has fallen by over 5%, putting pressure on the spending willingness and confidence of high-income groups.
Macroeconomic data from the Atlanta Fed's GDPNow model suggests first-quarter economic growth could reach 2%, but this is measured against the low base of just 0.7% growth in the fourth quarter of last year—a period of weakness partly attributable to the government shutdown. Economists had expected the drag from the fourth quarter to result in a rebound in the first quarter, but the rebound appears quite limited so far.
Last week, Powell explicitly rejected the use of the term "stagflation," stating the current situation is not comparable to the 1970s era of "double-digit unemployment and extremely high inflation." However, some economists believe the current situation might be termed "mild stagflation"—while less severe than the past, the challenges to growth and policy are equally significant.
Despite the rising risks, several economists still believe the U.S. economy is not yet on the brink and point to potential for recovery if geopolitical tensions ease. The "Big and Beautiful" Act passed in 2025 is expected to stimulate growth by reducing regulatory burdens and boosting tax refunds, providing some buffer for consumers against high prices. Rising productivity is also seen as a favorable factor for the economy.
Allianz economist North said, "There is still support at the bottom of the economy, which makes me very reluctant to use the word 'recession.' But I do think we are experiencing a slowdown this year."
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