Goldman Sachs is getting worried about the economy

Goldman Sachs forecasts a significant slowdown in U.S. economic growth, projecting a 1.1% annual GDP pace through 2025, primarily due to the real income drag from escalating tariffs on consumer spending. The firm anticipates a 15% effective tariff rate, which is expected to push 2025 PCE inflation to 3.3% and double the recession risk to 30%. While some indicators suggest economic resilience, Goldman notes that larger tariffs could prompt more aggressive Federal Reserve rate cuts despite the central bank's current wait-and-see approach.

Analysis

Goldman Sachs projects a notable deceleration in U.S. economic growth, forecasting a 1.1% annual GDP pace through 2025. The firm attributes this slowdown primarily to the adverse impact of tariffs on real income and consumer spending, which it expects will offset the benefits of easier financial conditions. This pessimistic outlook is supported by a reported 0.5% annualized GDP contraction in the first quarter, where consumer spending grew by a meager 0.5%. Goldman's base case assumes an effective tariff rate of 15%, which is projected to elevate the PCE price index to 3.3% in 2025, subsequently doubling the firm's estimated recession risk to 30%. While the Federal Reserve is expected to adopt a 'wait-and-see' approach, Goldman notes that larger-than-expected tariffs could necessitate more aggressive rate cuts to counter threats to employment and supply chains. This forecast stands in contrast to some current indicators, such as the Atlanta Fed's more robust 2.4% Q2 GDP tracking estimate and a rebound in consumer sentiment, highlighting a period of significant economic uncertainty.

Key Decisions for Investors

• Given the forecast of slowing growth and a 30% recession risk, investors should consider adopting a more defensive posture, potentially reducing exposure to cyclical sectors dependent on robust consumer spending.
• Monitor incoming inflation data (PCE) and trade policy developments closely, as these are the central drivers of Goldman's pessimistic forecast and any deviation could significantly alter the market outlook.
• Pay close attention to Federal Reserve communications, as the potential for more aggressive rate cuts in a high-tariff scenario could create opportunities in rate-sensitive assets even as the broader economy slows.