Oil prices have soared following Iran’s closure of the Strait of Hormuz, and some economists are worried that higher energy costs could be the straw that breaks the camel’s back. Mark Zandi, chief economist at Moody’s Analytics, said Monday that his firm’s “machine learning based leading economic indicator model” now shows a 49% chance of a recession in the next 12 months.
While a weak U.S. labor market is a prime factor in the deteriorating outlook, energy costs also play a key role. “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,” Zandi said. “Higher oil prices don’t do the same economic damage as in years past, as we produce as much as we consume, but consumers still get hit hard and fast, and they were already increasingly nervous spenders. ... if oil prices remain elevated for much longer (weeks and not months), a recession will be difficult to avoid.”
