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 over the past year.
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-months 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.
While economists still debate the pass-through impact from higher energy, the trend has held.
"The negative consequences of higher oil prices happen first and fast," Zandi said. "If oil prices stay kind of where they are through Memorial Day, certainly through the end of the second quarter, that'll push us into recession."
Like his fellow forecasters, Zandi said his "baseline" expectation is that the warring sides find a diplomatic off-ramp, oil flows again through the Strait of Hormuz and the economy can avoid a worst-case scenario.
To be sure, economists as a lot are negative and subject to the old trope about predicting nine of the last five recessions. Markets also have been wrong about where the economy is headed. A portion of the yield curve — or the spread between various Treasury maturities — most closely watched by the Fed has sent repeated false recession signals for much of the past 3½ years.
But the threat of a prolonged war, pressure on a consumer who drives more than two-thirds of all growth, and a labor market that created virtually no jobs in 2025 collectively raises the risk that the expansion could falter.
"That path through is increasingly narrow, and it's getting increasingly difficult to see the other side," Zandi said.
Consumers also are pessimistic. Consumer site NerdWallet said its March survey showed 65% of respondents expect a recession in the next 12 months, up 6 percentage points from the month before.
Troubles with jobs
Beyond energy prices, economists say the labor market is a key pressure point.
The U.S. economy created just 116,000 jobs for all of 2025 and lost 92,000 in February. While the unemployment rate has held steady at 4.4%, that's largely been because of a dearth of firing rather than a burst in hiring.
Moreover, the labor market has been plagued by narrow breadth of hiring. Excluding the robust gains in health care-related fields — more than 700,000 in all — payrolls outside those areas declined by more than half a million over the past year.
"I think there's much less inflation risk than [Fed officials] think, and more risk to the labor market to the downside than they stated," said Luke Tilley, chief economist at Wilmington Trust.
"We're getting more people who need more health care going into the future," added Dan North, senior U.S. economist at Allianz. "The demand for those jobs is going to be there. But it's no way to run a railroad if you're doing it on one engine."
Employment, of course, is a key driver for consumer spending, which has held strong despite rising prices and worries about growth.
Those twin concerns have spurred talk about stagflation, the combination of soaring inflation and sagging growth that plagued the U.S. in the 1970s and early '80s. Fed chief Powell rejected the characterization in a news conference following last week's policy meeting at which the central bank held its benchmark interest rate in a range between 3.5%-3.75%.
"I always have to point out that that was a 1970s term at a time when unemployment was in double figures, and inflation was really high," he said. "That's not the case right now."
"It's a very difficult situation, but it's nothing like what they faced in the 1970s, and .. I reserve stagflation for that, the word, for that period. Maybe that's just me," Powell added.
Cracks in the foundation
The current situation, then, may be more stagflation-lite — a condition not as pronounced as the prior episode but one that nonetheless poses risks. Consumer sentiment has been generally poor, held back primarily by those at the lower end of the income spectrum who are hit particularly hard by higher prices.
Wilmington Trust's Tilley warned that spending has been heavily supported by rising asset prices, a dynamic that may not persist.
"We estimate that 20% to 25% of the spending growth has been boosted by the wealth effect coming from the stock market over the past two years," he said. "If you don't get that wealth effect boost, then you're going to lose a lot of the growth."
Indeed, stocks have had a rough ride during the war. The Dow Jones Industrial Average has fallen more than 5% during the hostilities — important because consumer spending and sentiment have been supported by higher-income households benefiting most from rising equity prices.
Gross domestic product is on track to grow at a 2% pace in the first quarter, according to the Atlanta Fed's GDPNow tracker of rolling data. However, that's coming off an increase of just 0.7% in the fourth quarter, the product in part of the government shutdown. Economists had expected that the drain on growth in Q4 would translate to a boost in Q1, but the effects of that appear to be modest.
Still, if global leaders can find an end to the war soon, the economy again is expected to skirt the gloomiest predictions. Stimulus from the One Big Beautiful Bill in 2025 is projected to goose growth, with lower regulations and a boost in tax returns that could help consumers cope with elevated prices. A sustained rise in production also is a factor in the economy's favor.
"There is support underneath," said North, the Allianz economist. "That makes me real hesitant to use the 'R' word. But certainly, I think we're seeing a slowdown this year."