What are the Chances of the US Falling into a Recession? Economists Give Gloomy Answers

How AI and the US-Iran conflict could increase the likelihood of a US recession

Cailian Press, March 17 (Editor: Ma Lan) The US-Iran conflict is triggering increasingly unpredictable effects, causing concern among some Wall Street institutions and economists about the outlook for the US economy.

Moody’s Chief Economist Zandi recently warned that amid the US-Iran conflict and soaring oil and gas prices, the risk of a recession in the US is rising sharply. His model predicts a 48.6% chance of a recession in the next 12 months.

He also added that since World War II, except for the recession triggered by the COVID-19 pandemic, every recession has followed a surge in oil prices. Although the US is now a net oil exporter and less affected by oil price fluctuations, American consumers had already started cautious spending before the outbreak of the US-Iran conflict, indicating underlying economic issues.

Goldman Sachs expects a 25% chance of a recession in the US within the next year, citing reasons such as a weak labor market and high oil prices.

Not Very Optimistic

Irwin Stelzer, Director of Economic Policy Studies at the Hudson Institute, pointed out in a column that there are three ways to assess whether the US economy might fall into recession: history, current data, and analysis of the actual situation.

Historically, before the four recessions in 1973-75, 1980, 1981-82, and 1990-91, real energy prices increased by an average of 17.5%. This has led to a consensus among economists that rising oil prices are often a precursor to recession.

Market forecasts also support this consensus. The Kalshi prediction platform has raised its expectation of a US recession this year from 22% before the US-Iran conflict erupted to 31%. Goldman Sachs’s recession forecast has also increased from 20% to 25% during the same period.

On the economic data front, the US saw a decline of 92,000 non-farm jobs in February, far below the expected increase of 50,000. Inflation data is also concerning: over the past period, the US consumer price index increased by an average of 2.4% month-over-month, while the Federal Reserve’s core indicator—the Personal Consumption Expenditures Price Index—rose at an annualized rate of 3.1%, exceeding the 2% inflation target.

These two factors undoubtedly lay the groundwork for recession fears, but Stelzer believes there are other positive factors—artificial intelligence. Companies investing billions in AI infrastructure are confident about the future of the US economy, which could help the US avoid a recession.

The biggest current concern remains the destructive potential of the US-Iran conflict. Stelzer believes everything depends on how long the conflict lasts, but this is hard to predict, just as no one anticipated the ongoing Russia-Ukraine conflict.

More importantly, the US recession could have spillover effects globally. Oxford Economics reported on Monday that surveys show about one in six global companies expect a recession this year, and the proportion of respondents holding a pessimistic outlook for the next two years has roughly doubled to about three-quarters.

Additionally, the survey indicates that before the US-Iran conflict erupted, over three-quarters of respondents believed US exceptionalism would persist, but now that figure has fallen to just over half. Fewer companies expect the US to remain the fastest-growing economy among G7 nations this year.