With the war in Iran creating major economic uncertainty, some economists are forecasting that a recession could arrive this year. The economy had already been showing signs of weakness, including layoffs in Big Tech and enduring inflation concerns, and now surging oil prices are rocking U.S. markets. How bad might an economic downturn be in 2026? And are we prepared for a recession?
Guests:
Talmon Joseph Smith, economics reporter, The New York Times
Claudia Sahm, chief economist, New Century Advisors; former Federal Reserve economist; her Substack is "Stay-at-Home Macro"
This partial transcript was computer-generated. While our team has reviewed it, there may be errors.
Mina Kim: Welcome to Forum. I’m Mina Kim. Economists in recent days have raised their risk assessments of a recession in the next 12 months. Moody’s Analytics puts it at nearly 50%, driven by the nation’s weak job numbers, and notes that prolonged high oil prices would significantly increase that risk. Goldman Sachs has raised its odds to 30%, up from 25%.
An oil shock has preceded nearly every economic contraction in the last century, aside from the COVID pandemic, and consumers are pessimistic. NerdWallet’s March survey found 65% of respondents expect a recession in the next year. Today, we look at what’s driving recession risk, including uncertainty over the war in Iran.
And listeners, do you worry a recession is coming, or are you holding out hope? How are you preparing? You can tell us by calling 866-733-6786, posting on our social channels, or emailing us at forum@kqed.org.
Starting us off is Talmon Joseph Smith, economics reporter at The New York Times. Tal, welcome to Forum.
Talmon Joseph Smith: Thank you so much for having me.
Mina Kim: First, remind us how economists define a recession.
Talmon Joseph Smith: That’s a good question. Economists generally define a recession as a period when gross domestic product—GDP, the broadest measure of economic growth—contracts. The rule of thumb is two consecutive quarters of contraction. Since a quarter is three months, that means about six months of declining economic activity, with some caveats.
Mina Kim: Moody’s model predicts nearly a 50% chance of recession within 12 months, with odds increasing due to the war in Iran. What went into that forecast, and what do you think of it?
Talmon Joseph Smith: On the one hand—I know Mark Zandi, the lead economist there, and I’ll tease him later about a nearly 50-50 forecast. Economists get teased all the time for being “on the one hand, on the other hand.” But I’ll give them some leeway here, because the risks do feel balanced.
There’s a decent chance that, despite the chaos from this ongoing war, things work out okay—not that consumer sentiment improves or that there isn’t lasting damage, but that it’s not enough to tip us into recession. And yet, on the other hand, there’s an equal chance that this is the beginning of the end of the current expansion that followed the pandemic recovery—halted by market chaos and oil price surges tied to this president’s war.
Mina Kim: Zandi said that $125 to $130 a barrel could be a tipping point if prices stay there for months. How do oil prices have a cascading effect? Because I imagine oil prices alone wouldn’t cause a recession.
Talmon Joseph Smith: Right, not alone. But historically—whether we look at 1973, the late ’70s oil shocks tied to Iran, the Gulf War in the early ’90s, or the 2008 spike to $140 a barrel—oil price surges have often been the domino that exposes underlying vulnerabilities.
Oil remains a fundamental input in the global economy, even as renewables grow. Right now, we’re in a liminal period where inflation is expected to rise—most bank economists forecast at least 4%, and some market-based expectations suggest it could hit 5% by summer.
Oil drives inflation not just at the pump, but across the economy. Airfares are one example—jet fuel costs are rising, and airline CEOs, like those at United, have flagged that as a concern. But oil also affects transportation of goods, fertilizers, plastics—everything from packaging to groceries. Those costs get passed along to consumers.
Economists track both headline inflation, which includes everything, and core inflation, which strips out food and energy because they’re volatile. That’s usually helpful, though consumers understandably find it frustrating. But when an oil shock is big enough, it starts feeding into core inflation.
When that happens, two things follow: it becomes much harder to control inflation, and it drags down growth. That’s because growth is measured in “real” terms—adjusted for inflation. If inflation rises sharply and stays high, it mechanically reduces real growth. So we don’t know exactly where we’re headed, but we’re in a precarious place.
Mina Kim: Let me ask listeners: Do you worry a recession is coming, or are you holding out hope we can avoid it? Are you changing your spending habits—putting off big purchases? How is the roller-coaster stock market affecting you?
Email us at forum@kqed.org, find us on Discord, BlueSky, Facebook, Instagram, or Threads at @KQEDForum, or call us at 866-733-6786.
President Trump, as you noted, is very sensitive to oil prices and even directing the war with markets top of mind. Talk about what we’ve seen—including today, when he touted sending Iran a 15-point peace plan and markets reacted, even as Iran dismissed it.
Talmon Joseph Smith: We’re in this odd period where both sides are offering so-called maximalist deals—terms that neither side is likely to accept, especially given domestic political pressures. The U.S. is a flawed democracy, but a democracy nonetheless, so President Trump has to consider how outcomes play at home. Losing the war wouldn’t play well. Iran, while not a democracy, also has internal political dynamics it must manage.
What’s remarkable is how this president is using his war powers with markets in mind. Presidents have always considered markets, but Trump has taken “jawboning”—using rhetoric to influence markets—to another level.
For example, this past Sunday, he announced a temporary scaling back of the most intense attacks for about five days—conveniently taking us to market close on Friday. At that point, markets expect either de-escalation if a deal materializes, or renewed escalation—but after trading hours.
Mina Kim: I’m going to have you hold that thought, Tal, as we head into a break. We’ll talk more about this right after. Stay with us—I’m Mina Kim.