Alert Escalation! Goldman Sachs and Moody's Collectively Raise US Economic Contraction Risk, Recession Probability Soars to 48.6%

The U.S. economy is facing multiple pressures and shocks. As conflicts in the Middle East persist and oil prices surge sharply, combined with structural weakness in the labor market, major Wall Street institutions have recently significantly increased their estimates of the probability of a recession in the United States, with some forecasts approaching 50%.

On March 25, CNBC reported that Moody’s Analytics models show the probability of a U.S. recession in the next 12 months has risen to 48.6%; Goldman Sachs has raised its forecast to 30%; Wilmington Trust estimates a 45% chance; and EY Parthenon estimates 40%, warning that if the Middle East conflict further escalates or prolongs, this probability could quickly rise. In comparison, the baseline probability of a recession within any 12-month period under normal conditions is about 20%.

Federal Reserve Chair Jerome Powell last week at a policy press conference dismissed the characterization of “stagflation” and maintained the benchmark interest rate in the 3.5% to 3.75% range. However, as inflation pressures and downside risks to the labor market rise in tandem, policymakers face an increasingly difficult dilemma, and market concerns about the economic outlook continue to spread.

War Impact: Rising Oil Prices as the Direct Trigger for Recession

The ongoing conflict in the Middle East is the core driver behind the rising recession expectations. Historical data shows that since the Great Depression, almost every U.S. recession has been preceded by an oil price shock, except for the COVID-19 pandemic.

According to AAA data, over the past month, oil prices have increased by $1.02 per gallon, a 35% rise. Moody’s chief economist Mark Zandi said, “The negative impact of rising oil prices is coming quickly and fiercely. If oil prices remain at current levels around Memorial Day (the last Monday in May), or throughout the second quarter, it will push us into a recession.”

Zandi also noted that his “base scenario” remains that the conflict parties will find a diplomatic solution, the Strait of Hormuz will resume oil flows, and the economy will avoid the worst outcomes. But he also admitted, “That pathway is narrowing and becoming harder to see on the other side.”

Consumer confidence has also been noticeably impacted. A NerdWallet survey in March showed that 65% of respondents expect a recession in the next 12 months, up 6 percentage points from the previous month.

Labor Market: Structural Hidden Risks More Concerning Than Surface Data

Beyond energy prices, deep cracks in the labor market are another major concern for economists.

Data shows that the U.S. economy will add only 116,000 jobs in 2025, with a net decrease of 92,000 jobs in February alone. Although the unemployment rate remains at 4.4%, this is mainly due to fewer layoffs rather than increased hiring.

More worrying is the structural imbalance in job growth. Over the past year, employment in healthcare-related fields increased by over 700,000, but excluding this sector, total employment in other areas decreased by more than 500,000.

Luke Tilley, chief economist at Wilmington Trust, said, “I believe the inflation risk is much lower than what Fed officials think, while the downside risks to the labor market are underestimated.” Allianz senior U.S. economist Dan North also pointed out, “Relying on a single engine is not sustainable.”

Employment is the core support for consumer spending, which 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: Wealth Effect Ebbing, Growth May Slow Further

Another hidden concern in the current economy is that the resilience of consumer spending partly depends on the wealth effect from rising asset prices, which is now weakening.

Tilley from Wilmington Trust estimates that 20% to 25% of the past two years’ consumption growth came from the wealth effect of rising stock markets. Since the conflict erupted, the Dow Jones Industrial Average has fallen more than 5%, putting pressure on high-income groups’ willingness and confidence to spend.

From macro data, the Atlanta Fed’s GDPNow model indicates that U.S. GDP growth in the first quarter could reach 2%, but this is based on a low base of only 0.7% growth in Q4 last year—partly due to the drag from the government shutdown. Economists initially expected a rebound in Q1 after the Q4 slowdown, but the current outlook suggests the rebound will be quite limited.

Last week, Powell explicitly rejected the term “stagflation,” stating that the current situation is not comparable to the 1970s’ “double-digit unemployment and high inflation.” However, some economists consider the current scenario to be a “mild stagflation”—not as severe as then, but still posing significant challenges to growth and policy.

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

Despite rising risks, many economists believe the U.S. economy has not yet reached the edge of the cliff and point out that if geopolitical tensions ease, there is room for recovery.

The 2025 “Build Back Better” act is expected to stimulate growth by reducing regulatory burdens and boosting tax rebates, providing some buffer for consumers facing high prices. Additionally, sustained productivity growth is viewed as a positive factor for the economy.

North from Allianz said, “There is still support at the bottom of the economy, which makes me reluctant to call it a ‘recession.’ But I do believe we are experiencing a slowdown this year.”

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