Will High Oil Prices "Backfire" on the US Economy? Moody's Chief: Recession Will Be Difficult to Avoid if Prices Are Not Reduced Within Weeks!

What is the basis for Moody’s machine learning model predicting recession probabilities?

Caixin, March 17 (Editor: Huang Junzhi) Moody’s Chief Economist Mark Zandi recently warned that as long as the “global energy choke point” Strait of Hormuz remains closed, the U.S. economic outlook will continue to worsen, even if current U.S. oil and natural gas production roughly match consumption, which could ease upward pressure on oil prices.

According to him, as long as high oil prices do not “subside” in the coming weeks, a recession in the U.S. will be difficult to avoid.

In fact, before the outbreak of the U.S.-Iran war, Moody’s leading indicators based on machine learning already showed a 49% chance of a U.S. recession within the next 12 months. Now, Zandi expects that when the model releases its next data, the probability will reach 50% or higher.

Weak labor market data is a major reason for the worsening outlook, but Zandi pointed out that many other economic indicators have also declined in recent months. Official data shows that GDP in Q4 2025 grew only 0.7% in the last three months of that year.

The U.S.-Iran war would only exacerbate these issues, Zandi further noted, as it could trigger a new round of inflation for American consumers already tired of rising prices.

He posted on social media platform X: “Recession once again poses a serious threat.”

Zandi said that other economists seem less willing to raise their recession forecasts—several investment banks maintain a 30% to 40% expectation of recession. The Yardeni Research team recently raised its recession forecast to 35%.

However, he emphasized that investors have good reason to be worried—because since World War II, except for the brief COVID-19 recession, every recession has been accompanied by soaring oil prices.

Of course, this does not mean that every oil price spike causes a recession. After the Russia-Ukraine conflict erupted in 2022, it intensified the most severe inflation wave in decades. But at that time, the U.S. was in a growth boom driven by post-pandemic stimulus policies, which helped the economy withstand the impact of rising borrowing costs when the Federal Reserve rapidly raised interest rates.

However, Zandi specifically pointed out that even before the U.S.-Iran conflict, the U.S. economy had already shown signs of fatigue.

“Years ago, after the Fed tightened monetary policy, many believed a recession was imminent, and they openly expressed this view, but they were wrong. However, if oil prices stay high for longer (weeks rather than months), a recession will be hard to avoid,” Zandi wrote on X.

Another analysis indicates that the U.S. currently produces roughly as much oil and natural gas as it consumes, which helps mitigate the impact of rising global energy prices. However, Zandi said that if energy prices suddenly spike, consumers will still face a “heavy and rapid” blow.

(Caixin, Huang Junzhi)