Recession odds climb on Wall Street as economy shows cracks beneath the surface

The U.S. economy is facing heightened risks of a recession as a result of various factors, including the ongoing war with Iran and rising energy prices. Federal Reserve Chair Jerome Powell and other economists have raised concerns about the potential for stagflation, a combination of high inflation and low economic growth.

The war with Iran has led to a significant increase in oil prices, which historically has been a precursor to recessions in the U.S. The recent surge in gas prices has put additional strain on consumers and businesses, potentially pushing the economy into a downturn.

Economists have also pointed to weaknesses in the labor market as a key factor in the increased risk of a recession. Despite a low unemployment rate, job creation has been lackluster, with only 116,000 jobs added in 2025 and a net loss of 92,000 jobs in February. This has led to concerns about the overall health of the economy and its ability to sustain growth.

Consumer sentiment has also been negatively impacted by rising prices and economic uncertainty. Many Americans are worried about the potential for a recession in the next 12 months, with 65% of survey respondents expecting a downturn. This pessimism could further dampen consumer spending, a key driver of economic growth.

While Fed Chair Powell has rejected the characterization of the current economic situation as stagflation, economists warn that the risks are real. The combination of high inflation, low job growth, and geopolitical uncertainty could push the economy into a period of stagflation-lite, posing significant challenges for policymakers and businesses alike.

As the situation continues to evolve, it will be crucial for policymakers to carefully monitor economic indicators and take appropriate action to mitigate the risks of a recession. The path forward is uncertain, but proactive measures may help to steer the economy away from a potential downturn. The recent hostilities have taken a toll on the stock market, with the Dow Jones Industrial Average dropping more than 5%. This decline is significant as it could impact consumer spending and sentiment, especially among higher-income households that have been benefiting from the rising equity prices. Without the wealth effect boost, there is a risk of losing out on potential growth opportunities.

Despite the challenges faced during the war, the economy is still showing resilience. The Gross Domestic Product (GDP) is projected to grow at a 2% pace in the first quarter, following a modest increase of 0.7% in the fourth quarter. Economists had anticipated a boost in growth in Q1 following the government shutdown in Q4, but the effects seem to be more subdued.

However, there is optimism that if global leaders can bring an end to the war soon, the economy could avoid the worst-case scenarios. The proposed One Big Beautiful Bill in 2025 is expected to provide stimulus through lower regulations and increased tax refunds, which could help consumers deal with higher prices. Additionally, a sustained rise in production is also contributing to the positive outlook for the economy.

According to Allianz economist North, there is underlying support for the economy, which makes him hesitant to use the term ‘recession.’ Nevertheless, there is a consensus that there will be a slowdown in growth this year.

In conclusion, while the ongoing war has presented challenges for the economy, there are still reasons for cautious optimism. By addressing the issues at hand and implementing supportive measures, there is a possibility of mitigating the impact of the conflict on economic growth. Stay informed with trusted sources like CNBC to keep up with the latest developments in the business world.