Alarm raised! Goldman Sachs and Moody’s jointly upgrade U.S. economic contraction risk; recession probability surges to 48.6%.

The U.S. economy is facing a confluence of mounting pressures. With the Middle East conflict persisting and oil prices surging sharply—compounded by structural weakness in the labor market—major Wall Street institutions have recently significantly raised their forecasts for a U.S. recession, with some estimates now approaching 50%. On March 25, CNBC reported that Moody’s Analytics’ model shows the probability of a U.S. recession within the next 12 months has risen to 48.6%; Goldman Sachs raised its forecast to 30%; Wilmington Trust assigned a 45% probability; and EY Parthenon estimated 40%, warning that this figure could climb rapidly if the Middle East conflict further escalates or drags on. By comparison, the baseline probability of a recession occurring in any given 12-month period under normal conditions is approximately 20%. Federal Reserve Chair Jerome Powell, in his press conference following last week’s policy meeting, rejected the characterization of “stagflation” and held the benchmark interest rate steady at 3.5%–3.75%. Yet as inflationary pressures and downside risks to the labor market intensify simultaneously, policymakers’ dilemma is deepening—and market anxiety over the economic outlook continues to spread. War impact: Soaring oil prices—the most direct trigger of recession The ongoing Middle East conflict is the core driver behind the heightened recession expectations. Historical data shows that, excluding the pandemic, nearly every U.S. recession since the Great Depression has been preceded by an oil-price shock. According to AAA, gasoline prices have surged $1.02 per gallon over the past month—a 35% increase. Mark Zandi, Chief Economist at Moody’s Analytics, stated: “The negative impact of rising oil prices hits fast and hard. If oil prices remain at current levels through Memorial Day (the last Monday of May) and across the entire second quarter, it will push us into recession.” Zandi also noted that his “baseline scenario” remains one where the warring parties reach a diplomatic resolution and oil flows resume through the Strait of Hormuz—allowing the economy to avoid the worst-case outcome. Yet he candidly admitted, “That path is narrowing—and it’s becoming increasingly difficult to see the other side.” Consumer confidence has likewise taken a clear hit. A March NerdWallet survey found that 65% of respondents expect a recession within the next 12 months—an increase of six percentage points from the prior month. Labor market: Structural vulnerabilities run deeper than surface-level data Beyond energy prices, economists are also deeply concerned about underlying fissures in the labor market. Data shows the U.S. economy added only 116,000 jobs for all of 2025, while February saw a net loss of 92,000 jobs. Although the unemployment rate remains at 4.4%, this stability stems primarily from reduced layoffs—not from expanded hiring.

Yang Delong: Low market sentiment and shrinking trading volume signal that the market correction is nearing its end.

Following Friday’s U.S. equity market correction, Asian-Pacific stock markets opened lower on Monday, with semiconductor stocks particularly hard-hit—dragging down the Nasdaq and exerting significant spillover pressure on semiconductor shares across the Asia-Pacific region. Over the weekend, market expectations regarding the Federal Reserve’s next move diverged. Last week’s U.S. CPI report for September came in at 3.7%, exceeding both August’s 3.4% and the market’s prior expectation of 3.6%, prompting speculation that the Fed might hike rates by another 25 basis points in October. However, shortly thereafter, the Fed’s third-highest official—and a voting member this year—explained that the current U.S. inflation episode stems from three distinct layers of causes—not simply overheating demand: First, the Middle East conflict has placed the Strait of Hormuz in a near-blockade state, reducing oil supply and sending oil prices soaring toward the $110/barrel threshold. As oil is the lifeblood of industry, its price surge has directly pushed up U.S. inflation. Second, massive AI-related capital expenditures by the ‘Magnificent Seven’ tech giants have driven up prices across related industries—especially chips. Leading memory-chip manufacturers have shifted production lines to high-end HBM chips, causing shortages—and sharp price hikes—for memory chips used in smartphones and PCs. Protests have erupted across the U.S., and several American courts have even sued Samsung and NVIDIA, accusing them of colluding to inflate chip prices and thereby raise consumer costs for smartphones and computers. This layer of inflation lies beyond the Fed’s control via interest-rate hikes. Third, inflation stemming from resilient economic growth and rising demand—this component responds modestly to rate hikes. Thus, the official suggested that back-to-back rate hikes in October are highly unlikely, though a single hike in December remains possible—depending on October and November’s inflation and nonfarm payroll data. He indicated that no further hikes may occur beyond 2027. His stance is decidedly dovish—bolstering investor confidence. While the Nasdaq has recently retreated, the current AI-driven tech rally has not yet reached a downward inflection point. Crucially, this rally’s turning point won’t be triggered by rising U.S. Treasury yields—but rather by a slowdown—or even an absolute decline—in AI-related capital expenditures. That hasn’t happened yet. Consequently, AI hardware firms like NVIDIA continue to post quarterly earnings that consistently beat expectations, sustaining the Nasdaq’s strength. In contrast, tech stocks in Japan, South Korea, and China’s A-share market have underperformed relative to their U.S. peers—largely because U.S. tech firms possess genuine earnings support and occupy dominant positions atop the value chain, whereas their Asian counterparts mainly serve as upstream suppliers or downstream integrators for U.S. tech firms—leaving them with comparatively weaker profitability and growth potential. Many tech stocks in the U.S., Japan, and South Korea have fallen nearly 50% from their early-July highs—with some dropping more than 50%. Yet on another level, this correction has helped deflate excessive valuations and release associated risks. Back in May and June—when market enthusiasm for AI was peaking—I highlighted three early-warning signals to alert investors, urging timely actions: cutting positions in half, deleveraging, and holding both tech and dividend-paying stocks—not betting everything on a single sector.

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ICIS US Economic Summary: Growth Continues Amid Middle East Conflict and Inflation

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