A recession will be hard to avoid if oil prices stay elevated for even a few more weeks, says Moody's

By Joseph Adinolfi

'Recession is once again a serious threat,' economist Mark Zandi says

The outlook for the U.S. economy will continue to worsen as long as the Strait of Hormuz remains closed.

The outlook for the U.S. economy will continue to darken as long as the Strait of Hormuz remains effectively closed to oil-tanker traffic, even though the U.S. now produces about as much oil and natural gas as it consumes.

That's according to Mark Zandi, Moody's chief economist, who thinks that if nothing changes within a few weeks, a recession could become unavoidable.

Even before the Iran conflict broke out, Moody's machine-learning-based leading indicators had reflected a 49% chance of a recession beginning in the U.S. within the next 12 months. Now, Zandi expects the model will show a probability of 50% or greater when its next reading arrives.

Weak labor numbers had driven much of the worsening U.S. outlook, although Zandi noted that plenty of other economic indicators have turned lower in recent months. The latest reading on fourth-quarter GDP showed growth of just 0.7% during the final three months of 2025, according to official data.

"Recession is once again a serious threat," Zandi said in a post on X.

The Iran war has only compounded these problems by threatening to hit already price-weary American consumers with another wave of inflation.

Other economists have been less willing to ramp up their official forecasts for a recession, Zandi noted on X. Several investment banks have maintained recession probabilities somewhere in the 30% to 40% range. The team at Yardeni Research recently raised their forecast of a market meltdown this year to 35%, from 20% previously.

Yet investors have plenty of reason to be alarmed. Every recession since World War II - except for the brief COVID-19 pandemic recession - was preceded by a jump in oil prices, Zandi pointed out.

That's not to imply that every oil-price spike results in a recession. After Russia invaded Ukraine in 2022, it helped fuel the worst wave of inflation in decades. But back then, the U.S. was coming off a stimulus-driven postpandemic growth boom, giving the economy a significant buffer from the shock of higher borrowing costs when the Federal Reserve quickly jacked up interest rates.

Lately, however, the U.S. economy had been showing signs of strain before the U.S. and Israel attacked Iran on Feb. 28, triggering a big spike in oil prices (CL00) (BRN00).

"Many were sure a downturn was imminent in the wake of the Fed's monetary tightening a couple of years ago, vocally said so, but were wrong. However, if oil prices remain elevated for much longer (weeks and not months), a recession will be difficult to avoid," Zandi wrote on X.

The U.S. now produces about as much oil and natural gas as it consumes, which has helped to lessen the damage from higher energy prices globally. Yet consumers will still get hit "hard and fast" by a sudden spike in those prices, Zandi said.

While the S&P 500 SPX has been trading below its record high from January, most stock-market strategists would agree that Wall Street isn't pricing in a recession. The equity index rose 1% on Monday to 6,699.38, its biggest one-day gain since Feb. 6, according to Dow Jones Market Data. The Dow Jones Industrial Average DJIA and Nasdaq Composite COMP also climbed on Monday.

-Joseph Adinolfi

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03-17-26 0901ET