Alert upgrade! Goldman Sachs and Moody's collectively raise the risk of U.S. economic contraction, recession probability surges to 48.6%.

The US economy is facing multiple overlapping pressures. With the ongoing conflict in the Middle East and a sharp rise in oil prices, coupled with structural weaknesses in the labor market, major Wall Street institutions have recently significantly increased the probability of a US economic recession, with some forecasts approaching 50%.

On March 25, CNBC reported that Moody's Analytics models show that the probability of the US falling into recession in the next 12 months has risen to 48.6%; Goldman Sachs has raised its forecast to 30%; Wilmington Trust gives a probability of 45%; EY Parthenon estimates it at 40%, warning that if the conflict in the Middle East expands or persists, this probability could quickly increase. In comparison, the baseline probability of a recession occurring in any given 12 months under normal circumstances is about 20%.

Federal Reserve Chair Powell last week dismissed the characterization of “stagflation” at a news conference after the policy meeting, and kept the benchmark interest rate unchanged in the 3.5% to 3.75% range. However, as inflation pressures and downside risks in the job market simultaneously increase, policymakers are facing an intensifying dilemma, and market concerns about the economic outlook continue to spread.

War Impact: Surging Oil Prices Become the Direct Trigger of Recession

The continued conflict in the Middle East is the core driver behind the rising expectations of this recession. Historical data shows that, since the Great Depression and excluding the COVID-19 pandemic, almost every US economic recession has been preceded by oil price shocks.

According to AAA data, oil prices have increased by $1.02 per gallon in the past month, a rise of 35%. Mark Zandi, chief economist of Moody's Analytics, said, “The negative impact of rising oil prices hits fast and hard. If oil prices stay at current levels around Memorial Day (the last Monday in May) and throughout Q2, it will push us into recession.”

Zandi also noted, his “base case” remains that both sides find a diplomatic solution, the Strait of Hormuz resumes oil flow, and the worst economic outcome is avoided. But he also admitted, “That path is getting narrower and it’s harder to see the other end.”

Consumer confidence has also been clearly affected. A March survey by NerdWallet found that 65% of respondents expect a recession in the next 12 months, up 6 percentage points from last month.

Labor Market: Structural Risks More Worrying Than Surface Data

Aside from energy prices, deep fractures in the labor market are another key concern for economists.

Data shows the US economy will add only 116,000 jobs for all of 2025, while February saw a net decrease of 92,000 jobs. Though the unemployment rate stays at 4.4%, this is mainly due to fewer layoffs rather than hiring expansion.

Even more concerning is the structural imbalance in job growth. Over the past year, health-related sectors added more than 700,000 jobs, but excluding this sector, jobs in other fields decreased by over 500,000 combined.

Luke Tilley, chief economist at Wilmington Trust, said, “I believe inflation risks are much lower than Fed officials judge, and downside risks in the labor market are underestimated.” Allianz senior US economist Dan North also pointed out, “Reliance on a single engine is never sustainable.”

Jobs are the core support for consumer spending, which accounts for more than two-thirds of US economic growth. Persistent weakness in the labor market poses a direct threat to the foundation of economic expansion.

Consumption & Assets: Waning Wealth Effect May Further Slow Growth

Another concern for the current economy is that the resilience of consumer spending partly depends on the wealth effect brought by rising asset prices, which is now wavering.

Tilley of Wilmington Trust estimates that 20% to 25% of consumption growth over the last two years came from the wealth effect of rising stock markets. However, since the conflict broke out, the Dow Jones Industrial Average has fallen by over 5%, and the consumption willingness and confidence of high-income groups have been put under pressure.

Looking at macro data, the Atlanta Fed GDPNow model shows the US economy could grow 2% in the first quarter, but that is based on a low base of just 0.7% growth in the fourth quarter last year—whose weakness was partly due to the drag from the government shutdown. Economists initially expected a rebound in Q1 from fourth quarter drag, but now that rebound appears quite limited.

Powell last week explicitly refused to use the term “stagflation,” saying the situation is not comparable to the “double-digit unemployment and extremely high inflation” of the 1970s. But some economists believe that the current situation could be called “mild stagflation”—while not as severe as back then, the challenges for growth and policy remain significant.

Potential Buffer: If War Ends, the Economy May Still Find Support

Despite rising risks, many economists believe the US economy hasn’t yet reached the brink and note that if the geopolitical situation eases, there is room for economic recovery.

The “Big & Beautiful” bill passed in 2025 is expected to stimulate growth by reducing regulatory burdens and boosting tax refunds, providing some cushion for consumers facing high prices. Ongoing increases in productivity are also seen as a favorable factor for the economy.

Allianz economist North said, “The bottom of the economy still has support, which makes me very reluctant to use the word ‘recession.’ But I do think we’re experiencing a slowdown this year.”

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