Wall Street's biggest nightmare

What do you get when you mix a stagnating economy with sticky inflation?

You guessed it (or just sounded it out): stagflation.

On Monday, the latest manufacturing activity report from the Institute of Supply Management showed that economic growth hit a speed bump. Monday also delivered the Conference’s Board’s consumer confidence index, which showed shoppers haven’t felt this strained since February 2021.

Toss in the shockingly weak private sector jobs report, which showed the labor market’s fracture lines are spreading, and it’s no wonder that the Atlanta Fed just lowered its GDP forecast and now predicts a 2.8% economic contraction this quarter.

All that adds up to the stagnant economic growth part of “stagflation.” As for inflation, President Trump’s sweeping tariffs are expected to stoke price hikes amid a broader pullback in consumer spending.

All of that is why banks are ominously ticking the boxes on their recession indicator checklists. JPMorgan’s probabilistic model now shows a 31% chance of an economic downturn, up from 17% in November.

This fear that an economic slowdown could trigger a recession, or stagflation, or both, has sparked the latest selloff. Investors have been bailing on exciting, fun stocks to replace them with boring, stable bonds—which have rallied amid the bearish turn in equities.

Don’t freak out

We get it—stagflation is a scary combination of two already spooky words. But the pros say that the current fear may be overblown.

“From our perspective, we see a slowing economy as something like a temporary air pocket in the nearer term, and we continue to expect solid economic growth in 2025,” explained Wells Fargo Senior Global Market Strategist Scott Wren. “We see market uncertainties and fixed income as the year progresses. Be patient, but ready to act,” he wrote.

Goldman Sachs chief economist Jan Hatzius added that the negative data points aren’t actually quite as severe as they look on the surface. For example, he noted that a lot of the slower consumer spending in January was probably due to a regular seasonal slowdown and cold weather. “While we do expect GDP growth to slow this year, and policy uncertainty poses some additional downside risk, the latest data points are not as bad as they look,” he said.—LB