Economists see growing risk of recession for US as war drags on
As the war in Iran enters its fifth week, there are mixed messages on how long the conflict could drag on, and some economists see that uncertainty as increasing the risk of the US economy slipping into a recession.
What has heightened the concern is the fact that the geopolitical volatility is happening at the same time that the American labor market is showing signs of weakening, creating parallel risks for the economy.
Goldman Sachs has increased its estimate for a US recession to 30%, while Moody's Analytics raised its outlook for a recession over the next 12 months to 48.6%. Wilmington Trust has now boosted its recession odds to 45%, while EY-Parthenon has placed it at 40%.
"Those odds could rapidly rise in the event of a more prolonged or severe Middle East conflict," EY-Parthenon Chief Economist Gregory Daco wrote in a note.
Mark Zandi, chief economist for Moody's Analytics, noted in a post on X that the firm has cut its expectations for GDP growth with the US economy by 20 basis points since the war in Iran has started. He added that Moody's is tentatively set to increase its oil price forecast in April by $10 per barrel, which would cut an additional 15 basis points from real GDP growth for the year.
"With tenuous prospects for resolving the conflict with Iran, and financial markets under pressure, recession probabilities are high and rising," Zandi said. "We don’t yet anticipate an outright downturn in our baseline (most likely) outlook for the economy, but we’ve been aggressively marking down our forecast."
While speaking on the BBC's "Big Boss Interview" podcast, BlackRock CEO Larry Fink said that it was "too early" to know the long-term effects of the conflict in the Middle East, but that if oil hits $150 a barrel then the global economy would likely plunge into a "stark and steep recession."
“To me, everybody has to recognize that there’s not going to be an outcome that’s somewhere in the middle,” Fink said. “It’s going to either be two extremes.”
Not everyone is ready to sound the alarm
However, Jake Weinstein, senior VP of the asset allocation research team at Fidelity Investments, sees the US economy being resilient enough to weather the geopolitical disruption - at least for now.
“I would say there’s a higher probability now compared to several weeks ago that we’re heading into a recession, but the question is how much and how elevated is it?” he said on Fidelity's Market Sense podcast.
According to Weinstein, the US economy is still in a "midsize expansion," which is defined as growth being moderate and not decelerating.
He also points to macro factors that are still in place to support economic expansion, which includes having accommodative policy from the Federal Reserve, accommodative fiscal policy, and a steady flow of credit.
While both oil prices and inflation have risen over the last several weeks due to the war in Iran, Weinstein does not see them rising high enough to throw the US economy off its expansionary path.
“The US economy is very well diversified,” he said. “It’s got a lot of different types of sectors in it and frankly we don’t think the current events that are occurring have increased recession probability or odds enough to be completely concerned about.”
However, Weinstein warned that if the Strait of Hormuz stays closed for an extended period of time, that would likely have a more far-reaching impact on the global economy, from the US to Europe and also Asia.
He notes that the market at the moment is expecting a fairly quick resolution which is why there hasn’t been as much of a negative shock as there could be over the closing of something as vital to the global economy as the Strait.