- Economists for investment bank Goldman Sachs no longer see just a 20% risk of a recession, warning the probability is now 35%, given the tax-like impact on real disposable income and consumer spending from higher tariffs and their tendency to unnerve financial markets.
Goldman Sachs is warning that the odds of the U.S. economy shrinking over the coming months are rising dramatically.
In a research note to clients published on Sunday, Wall Street’s best-known investment bank says it expects there is a 35% chance that gross domestic product could contract for two straight quarters, up from just 20% previously.
It blamed the tax-like impact on real disposable income and consumer spending from higher tariffs as well as their tendency to unnerve markets, tighten financial conditions, and create added uncertainty for businesses looking to invest.
“The increase in our recession probability reflects our lower growth baseline, the sharp deterioration in household and business confidence in the outlook over the last month, and statements from White House officials indicating greater willingness to tolerate near-term economic weakness in pursuit of their policies,” the bank said.
Economists with Goldman informed clients they were raising their tariff assumptions for the second time in less than a month, arguing investors were underestimating the risk higher import duties would have on the economy.
“We note that President Trump recently said he expected his planned tariffs to raise the unusually specific figure of $600 billion to $1 trillion over the next year, implying an average effective tariff rate of 18% to 30% on current import volumes.”
It estimates the combined impact of fiscal, immigration, and tariff policy changes will subtract an estimated 1.2 percentage points from GDP growth over the next year.
Expect three rate cuts this year despite rising inflation
As a result, Goldman expects the Fed will cut interest rates in each of the three meetings scheduled for July, September, and November.
Importantly, this comes despite an expectation that core personal consumption expenditure (PCE), the Fed’s preferred yardstick for inflation, will peak at about 3.5% this year due to the hike in tariffs, rather than the 3.0% under its prior forecast.
Instead, Goldman expects the Fed will justify easing monetary policy by pivoting to concerns over the labor market and stalling growth from a current focus centering on price stability.
The Trump administration couldn’t be reached for comment by press time, but on Friday, spokesman Kush Desai told Fortune tariffs were a strategic tool needed to rebuild heavy industry after decades of the wrong trade policy led to U.S. factories being moved offshore.
“America cannot just be an assembler of foreign-made parts—we must become a manufacturing powerhouse that dominates every step of the supply chain of industries that are critical for our national security and economic interests,” he said.
“Recession by design”
Goldman Sachs isn’t the only one to take a more dour view toward growth.
Mark Zandi likewise hiked his odds that the U.S. economy will reverse. The Moody’s Analytics chief economist had previously expected a 15% risk, but now he sees this at a 40% probability. Zandi earlier this month had argued that if GDP were to shrink, it would be a “recession by design” or, put differently, a self-inflicted contraction in activity.
Trump has promised Americans a brighter economic outlook by lowering the price of energy, cutting taxes, and tackling anti-growth obstacles like bureaucratic red tape.
Yet there have been suspicions that Trump may first be trying to manufacture an economic cooldown to bring 10-year yields on sovereign bonds lower in what some have come to call a Trumpcession.
With an unusually high $6.7 trillion in U.S. debt needing to be refinanced this year, there are considerable fears on the part of investors like Ray Dalio, founder of the macro hedge fund Bridgewater, that Uncle Sam will struggle to find enough demand at affordable rates.
Altogether, some $28 trillion of outstanding U.S. national debt is traded among investors, and higher rates endanger the sustainability of servicing the interest burden, now greater than the Pentagon’s budget.
Given these concerns, the fears over Treasury Secretary Scott Bessent have indicated he is more concerned about his borrowing costs paid on the benchmark U.S. long bond than he is with the health of the stock market.
