Given the level of uncertainty with the economy, labor market, and inflation, some economists have started talking about the possibility of a recession or even “stagflation.”
The economy has been in sharp focus in recent weeks because of three reasons: substantial downward revisions to jobs data indicate that the labor market is weakening, inflation is still too high, and the Federal Reserve is poised to cut interest rates for the first time during President Donald Trump’s second term.
Those factors tie into fears about a recession and fears about the possibility of stagflation, which is a portmanteau of stagnation and inflation.
Economists are divided on just how likely it is that the economy will succumb to stagflation or fall into a recession, and there is added uncertainty given Trump’s tariff agenda, which has little past precedent to be compared to.
The data
To understand concerns about a recession and stagflation, the data and data trends are key.
Inflation is still too high. The Fed’s goal is 2% long-run inflation, and for years now, since the post-pandemic inflation wave, annual price growth has been too high, causing pain for consumers and causing the Fed to hike interest rates.
Inflation, tracked by the consumer price index, rose to 2.9% in August. The producer price index report showed that annual inflation unexpectedly fell seven-tenths of a percentage point to 2.6% for the year ending in August.
The Fed’s preferred gauge of inflation held steady at 2.6% for the year ending July, the most recent reading.
The job market is also flagging. Trump and the Fed got a bevy of bad news in recent weeks, indicating that the situation with the labor market is worse than was previously thought.
The economy added just 22,000 jobs in August, and the unemployment rate rose to 4.3%. Also, the July jobs report revealed that some 258,000 fewer jobs were added in May and June than previously reported.
Additionally, the government announced that labor market growth for the 12 months ending in March was 911,000 jobs less than previously reported.
Still, economic growth is chugging along. After dipping in the first quarter of 2025, U.S. gross domestic product expanded at a 3.3% annual rate in the second quarter, the Bureau of Economic Analysis reported in its most recent projection.
Stagflation
Stagflation is one of the worst economic scenarios that could play out. It’s when prices are rising while economic growth and the labor market are languishing.
The term was coined in the 1970s, when the economy suffered both high inflation and rising unemployment. Before then, many leading economists thought that combination was impossible. Instead, they believed that higher inflation could be traded off for lower unemployment.
But there is no precise definition for what constitutes a stagflationary economy. While inflation is too high, GDP is still expanding, and while weakening, the labor market is still treading water. There is no clear line in the sand that economists have to indicate when stagflation is occurring, according to Mark Hamrick, senior economic analyst at Bankrate.
“There is a sort of a threading of the needle that has to occur, in the sense of you still have sufficient price pressures occurring within an environment where growth is either lackluster or not present at all,” Hamrick said.
In a second-quarter update from August, Wells Fargo pegged the odds of a stagflationary scenario at an elevated, but steady 28%.
Michael Klein, an economics reporter at Tufts University, told the Washington Examiner that the stagflation that occurred in the 1970s was due to oil price shocks.
“So those kinds of shocks to the supply of goods and services can lead to a situation where you have inflation and a weak economy,” he said.
Klein highlighted the biggest factors today that could act in a similar way to those oil shocks from the 1970s. One factor would be the historic tariffs and their effect on the economy, and another would be the crackdown on immigration, given how many sectors of the economy rely on immigration. He said a third factor would be the uncertainty itself that exists right now — companies tend to hold off investing and hiring during periods of high uncertainty.
Peter Ireland, an economics professor at Boston College, said that while he thinks the concerns about stagflation are legitimate, he isn’t as concerned about it as other economists might be, largely because of the jobs data.
“I think a lot of the employment data is a view that we’re getting through the rear-view mirror,” Ireland told the Washington Examiner. “A lot of the downward revisions came from very early 2025 and 2024, and speak more to where the economy has been, as opposed to what we’re likely to see going forward.”
He also said that while economists are right to be concerned about tariffs, there are other economic policies under the Trump administration that have the opposite effect and are strongly pro-growth.
Recession
The definition of a recession is clearer cut, and recessions have occurred several times in U.S. history. Basically, it’s an economic downturn, but there is a much more precise metric for what that means than stagflation.
There isn’t a single government agency that has the authority to declare a recession. Instead, those in government and most economists look to the National Bureau of Economic Research to declare one. The NBER is a private group that is seen as an authority on the matter.
NBER defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months,” although there has been a historical precedent of labeling two consecutive quarters of negative economic growth recessionary. The periods feature rising unemployment.
The last recession was a very brief yet sharp downturn at the outset of the pandemic in 2020. And before that, the U.S. economy was in the Great Recession from 2007 to 2009.
Notably, GDP fell 0.5% in the first quarter, but rebounded in the second quarter. The Atlanta Fed’s “GDPNow” tracker predicts that GDP growth in the third quarter will grow by 3.1%, according to the latest estimate.
Heather Long, chief economist at Navy Federal Credit Union, told the Washington Examiner that, given the slowing labor market, right now the Fed’s biggest concern is preventing the economy from falling into a recession.
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This week, Moody’s Analytics chief economist Mark Zandi said that recession odds are now “uncomfortably high,” with the odds of a recession in the next year now at 48%.
“It’s less than 50%, but historically, the probability has never gotten this high, and a recession has not ensued,” he said.
