Alert Escalates! Goldman Sachs and Moodys Collectively Raise U.S. Economic Contraction Risk, Recession Probability Soars to 48.6%

The U.S. economy is facing a confluence of multiple pressures. With the ongoing Middle East conflict and a sharp surge in oil prices, compounded by structural weaknesses in the labor market, major Wall Street institutions have recently significantly elevated their forecasts for a U.S. economic recession, with some predictions approaching 50%.

On March 25, according to CNBC, Moodys Analytics' model indicates that the probability of the U.S. falling into recession within the next 12 months has risen to 48.6%; Goldman Sachs has raised its forecast to 30%; Wilmington Trust puts the probability at 45%; and EY Parthenon estimates it at 40%, warning that this probability could rapidly increase if the Middle East conflict further escalates or prolongs. In comparison, the baseline probability of a recession occurring in any given 12-month period under normal circumstances is approximately 20%.

Federal Reserve Chair Powell, at his press conference following last week's policy meeting, refuted the characterization of "stagflation" and maintained the benchmark interest rate in the 3.5% to 3.75% range. However, as inflationary pressures and downside risks to employment rise in tandem, the dilemma faced by policymakers is intensifying, and market concerns about the economic outlook continue to spread.

War Shock: Soaring Oil Prices Become the Most Direct Trigger for Recession

The continuation of the Middle East conflict is the core driving factor behind the heightened recession expectations. Historical data shows that since the Great Depression, almost every U.S. economic recession, with the exception of the COVID-19 pandemic, has been preceded by an oil price shock.

According to AAA data, oil prices have risen by $1.02 per gallon over the past month, a 35% increase. Mark Zandi, Chief Economist at Moodys Analytics, stated, "The negative impact of rising oil prices is swift and severe. 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 recession."

Zandi also pointed out that his "baseline scenario" remains that the warring parties find a diplomatic resolution, oil circulation in the Strait of Hormuz resumes, and the economy avoids the worst-case outcome. However, he admitted, "That path is becoming narrower and harder to see the end of."

Consumer confidence has also been noticeably impacted. A March survey by NerdWallet revealed that 65% of respondents expect a recession within the next 12 months, a 6-percentage-point increase from the previous month.

Labor Market: Structural Hidden Dangers Are More Concerning Than Surface Data

In addition to energy prices, deep fissures in the labor market are another significant focus for economists.

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

What is more alarming is the structural imbalance in job growth. Over the past year, the healthcare sector added over 700,000 jobs, while excluding this sector, other fields collectively lost over 500,000 jobs.

Luke Tilley, Chief Economist at Wilmington Trust, stated, "I believe the inflation risk is far below what Fed officials estimate, while the downside risk to the labor market is underestimated." Dan North, Senior U.S. Economist at Allianz, also commented, "Relying on a single engine is not a sustainable path."

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

Consumption and Assets: Fading Wealth Effect May Exacerbate Growth Slowdown

Another current economic concern is that the resilience of consumer spending partly relies on the wealth effect from rising asset prices, and this support is wavering.

Tilley of Wilmington Trust estimates that 20% to 25% of consumer spending 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 more than 5%, and the spending intentions and confidence of high-income groups are under pressure.

From a macroeconomic perspective, the Atlanta Fed's GDPNow model suggests that U.S. economic growth for the first quarter could reach 2%, but this is based on a low base of only 0.7% growth in the fourth quarter of last year—the weakness in the fourth quarter was partly due to the government shutdown. Economists had originally expected the drag from the fourth quarter to rebound in the first quarter, but the rebound appears to be quite limited.

Powell last week explicitly rejected the term "stagflation," stating that the current situation is incomparable to the "double-digit unemployment and extremely high inflation" of the 1970s. However, some economists argue that the current situation could be termed "mild stagflation"—while not as severe as back then, the challenges to growth and policy are equally significant.

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

Despite rising risks, several economists still believe the U.S. economy is not on the brink of a cliff and suggest that there is room for recovery if geopolitical tensions ease.

The "Great and Beautiful" Act passed in 2025 is expected to stimulate growth by reducing regulatory burdens and boosting tax refunds, providing some buffer for consumers to cope with high prices. Continuously rising productivity is also seen as a favorable factor for the economy.

Allianz economist North stated, "There is still underlying support for the economy, which makes me very reluctant to use the word 'recession.' However, I do believe we are experiencing a slowdown this year."