• Economists have pulled up their risk assessments of a U.S. contraction amid heightened uncertainty over geopolitical risk and a labor market that for the past year has shown strains.
• “I’m concerned recession risks are uncomfortably high and on the rise,” said Mark Zandi, chief economist at Moody’s Analytics. “Recession is a real threat here.”
• Twin concerns about growth and unemployment have triggered talk of stagflation, a characterization that Fed Chair Jerome Powell has rejected.
• But the threat of a prolonged war, pressure on consumers and a labor market that, outside of health care, lost hundreds of thousands of jobs last year has kept concerns elevated.

Federal Reserve Chair Jerome Powell last week pushed back when asked whether stagflation posed a threat to the U.S. economy. His successor may face a tougher challenge, as Wall Street forecasters raise their expectations of recession, brought on in part by the Iran war and potential for higher prices.

In recent days, economists have pulled up their risk assessments of a U.S. contraction amid heightened uncertainty over geopolitical risk and a labor market that for the past year has shown strains.

Moody’s Analytics’ model has raised its recession outlook for the next 12 months to 48.6%. Goldman Sachs boosted its estimate to 30%. Wilmington Trust has the odds at 45%, while EY Parthenon has it at 40%, with the caveat that “those odds could rapidly rise in the event of a more prolonged or severe Middle East conflict.”

In normal times, the risk for a recession in any given 12-month span is around 20%. So while the current predictions are hardly certainties, they signify elevated risk.

The situation poses a tough challenge for policymakers who are being asked to balance threats to the labor market against sticky inflation.

“I’m concerned recession risks are uncomfortably high and on the rise,” said Mark Zandi, chief economist at Moody’s Analytics. “Recession is a real threat here.”

War drives the fears

Talk of an economic contraction has accelerated as the war with Iran has dragged on.

An oil shock has preceded virtually every recession the U.S. has seen since the Great Depression, save for the Covid pandemic. Prices at the pump have risen by $1.02 a gallon over the past month, an increase of 35%, according to AAA.

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