With alarming headlines coming out of the Middle East, economists will be wary of sharing forecasts that might unnecessarily spook consumers or investors. Nonetheless, while Wall Street has remained calm(ish) about the disruption to global oil and energy supplies, Moody’s Mark Zandi warns that the longer-term macroeconomic picture has taken a turn for the worse.
Zandi shared that, even prior to the U.S. and Israel launching strikes on Iran, recession odds for the economy had crept up to an alarming threshold. The latest reading on Moody’s economic indicator model—for February, prior to the military action—placed odds of a recession at 49% over the next 12 months.
“Behind the recent jump are primarily the weak labor market numbers, but almost all the economic data have turned soft since the end of last year,” Zandi wrote in a note. Indeed, an image Zandi shared of the Moody’s recession indicator shows that historically, it has been fairly accurate. The indicator spiked above a benchmark of 50 in 2020, in 2007, and 2001—all of which were followed by recessions as defined by the Federal Bank of St Louis.
“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,” Zandi continued. “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.”
