Nearly half of Americans asked by a new YouGov poll believe the economy will collapse in the next decade. The sour sentiment comes as economic analysts have raised their recession predictions to essentially a coin toss, with the war in Iran sending oil prices soaring.
“It isn’t a stretch to expect the indicator to cross the key 50% threshold amid the Iranian conflict and the resulting surge in oil prices,” said Mark Zandi, chief economist at Moody’s Analytics. “Oil prices are an important variable in the model, and with good reason: every recession since WWII, save the pandemic recession, has been preceded by a spike in oil prices.”
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Zandi said that higher oil prices don’t hit the U.S. economy as hard as they used to since the U.S. produces as much as it consumes. However, he said it can still significantly affect consumers, a group Zandi said is already cautious about spending money.
What are the predictions?
While not as high, Goldman Sachs has also increased its recession prediction to 25%, a 5-percentage-point increase from its earlier forecast. Just like Moody’s, Goldman Sachs raised its recession likelihood because of rising oil prices.
Both groups say U.S. labor data show an economic slowdown. February’s payrolls showed that the market lost 92,000 jobs. Goldman Sachs analysts said that it is just enough to keep up with population growth, but not enough for a healthy expansion.
Unemployment has also ticked up to 4.4%, according to the latest federal data. Economists expect that number to increase to 4.6% later this year.
Moody’s and Sachs’ rising predictions follow similar trends among other economists. The Wall Street Journal reports that a review of 50 economists found the average recession prediction was 32%, up from 27% in January.
What role does the Iran war play in predictions?
The war in Iran, and more specifically its effects on crude oil prices, plays a massive role in many of these prediction percentages. But most assume the oil price shock will be temporary and that the economy’s endurance doesn’t falter.
“Given the ongoing war in the Middle East, surging oil prices, high tariffs, AI and the severe constraints on immigration, it is worthwhile noting how resilient the U.S. economy has been so far,” Bernard Baumohl, an economist for the Economic Outlook Group, told the Journal. “But we must not take this resilience for granted.”
When the Journal asked the economists what crude oil price could push their predictions to 50%, most gave responses from $90 to $200 a barrel, with the average of $138. The publication also asked how long that price has to last; they said an average of 14 weeks.
Crude oil prices have gotten close, but haven’t hit that target since the war began. The highest price hit was $119 on Thursday, but the highest close was a day earlier at just over $103 per barrel.
The intricacies of a conflict can also quickly change predictions. The Journal spoke to Robert Fry, the chief economist at Robert Fry Economics, who said the timeline for reopening the Strait of Hormuz could affect the likelihood of a recession.
“My forecast is contingent on the assumption that the Strait of Hormuz will be fully open to tanker traffic by mid-April,” he told the WSJ. “If it isn’t, oil prices will go much higher, and I will put a recession in my forecast.”
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When have predictions been wrong?
Recession fears have been around for years before the war in Iran. In 2023, some economists said it was 100% likely the U.S. economy would hit a recession within 12 months, but that never materialized.
Previous American excursions in the Middle East have brought incorrect recession predictions. In 1990, during the Gulf War, economists believed that the war would have mild to moderate effects on the economy. They, however, did not expect what actually happened. Instead, the U.S. entered a mild but significant recession, which lasted almost a year.
The biggest contributor to that recession was the price of crude oil doubling from $20 a barrel to $40. Economists blamed the uncertainty the war brought for a steep decline in consumer and business confidence, according to retrospective studies into the 1990 recession.
Back then, the economy was already slowing down before the Gulf War kicked off, similar to today’s economy. Just before the war, the Federal Reserve stated its goal was to reduce inflation, the same thing it’s doing now.
While those similarities may start to raise alarms, economists stress that the U.S. economy is massive, much bigger than it was in the early ‘90s. Joe Brusuelas, the chief U.S. economist at RSM, told CNN that the U.S. has the means to weather the storm for the moment.
“The risk of a recession has materially increased, but we’re not there yet,” Brusuelas told CNN. “The US is a $30 trillion dynamic and resilient beast. It has plenty of room to absorb an oil-based shock.”