The Fed and war in the Middle East are the 2 things that could push the US economy into a recession, 'Dr. Doom' economist Nouriel Roubini says

• The US economy still faces two risks that could push it into a recession, Nouriel Roubini warned.
• The "Dr. Doom" economist warned of higher interest rates and conflict in the Middle East.
• But markets don't appear to be pricing in those risks, which means investors could be caught by surprise.

The US is facing two risks that could push the economy into a recession, according to economist Nouriel Roubini.

The "Dr. Doom" economist, who is known for his persistently bearish takes on the markets and economy, pointed to lingering recession risks in the US despite robust economic growth and a strong labor market.

Though a soft-landing looks more likely now than it did a year ago, the risk of a mild recession can't be dismissed, he said in an interview with Fox Business on Thursday, as there are still two forces that could push the US into a downturn.

The first risk is the likelihood of a economic "no landing," he said, where GDP growth remains hot while core inflation remains stubbornly high. That will cause the Fed to push interest rates higher, a move that could overtighten financial conditions and push the US into a recession, Roubini warned.

The second risk is the possibility of the Israel-Hamas conflict spilling over into other parts of the region, which could prompt the involvement of major oil producers like Iran. That could cause oil prices to spike as much as 50%, potentially leading to a 1970s-style stagflationary shock that ushers in a recession. 

"Therefore, you cannot rule out a short and shallow recession next year, when now it looks less likely than a soft-landing," Roubini said. 

But stocks don't seem to be pricing in those risks — and investors expecting the Israel-Hamas war to remain contained could end up being surprised. If the conflict spreads, stocks could extend their recent correction and fall into a bear market. Meanwhile, bond yields could plunge as investors flock to safe-haven assets like US Treasurys, Roubini warned.

"Financial markets, weather it is oil markets, bonds, stock markets, and even gold, are underpricing the probability that these conflicts are going t0 become regional," he added. "I think the probability is reasonably high," he warned of the second scenario.

And though the Fed left the door open to possible future rate hike, most investors seem to think the rate hiking cycle is over. Markets are pricing in just a 20%-25% chance that the Fed could raise rates another 25 basis-points in the first quarter of 2024, according to the CME FedWatch tool. 

Other economists have also warned of recession risks, despite the resilience of the economy and the stock market so far this year. There are three warning signs that the economy could be slowing down despite its impressive performance, according to Societe Generale.