Key Takeaways:
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- Goldman Sachs has increased the probability of a U.S. recession within the next 12 months to 35%, nearly doubling its previous estimate of 20%.
- The bank has also raised its year-end 2025 core PCE inflation forecast to 3.5% year-over-year and lowered its GDP growth forecast to 1.0%.
- Anticipated reciprocal tariffs averaging 15% from the Trump administration are expected to exacerbate economic uncertainty and weaken household and business confidence.
- Goldman Sachs now forecasts three interest rate cuts by the Federal Reserve in 2025, with potential cuts occurring in July, September, and November.
What Happened?
Goldman Sachs has revised its economic outlook for the U.S., significantly increasing the probability of a recession to 35% due to escalating trade tensions and anticipated tariff announcements from the Trump administration. The bank expects President Trump to announce reciprocal tariffs averaging 15% across all U.S. trading partners, which could lead to retaliatory measures from other countries.
In light of these developments, Goldman Sachs has also adjusted its inflation and GDP growth forecasts. The year-end 2025 core PCE inflation forecast has been raised to 3.5%, while the GDP growth forecast has been lowered to 1.0%. Additionally, the unemployment rate forecast for 2025 has been increased to 4.5%.
The bank’s analysis indicates that recent declines in household and business confidence, coupled with a weaker growth baseline, have contributed to this more pessimistic outlook. Goldman Sachs noted that while sentiment has historically been a poor predictor of economic activity, the current fundamentals are not as robust as in previous years.
Why It Matters?
The increase in recession probability reflects growing concerns about the impact of trade policies on the U.S. economy. The anticipated tariffs could lead to higher consumer prices and reduced economic activity, further straining household budgets and business investments.
Goldman Sachs’ forecast of multiple interest rate cuts by the Federal Reserve suggests that the central bank may be preparing to respond to economic weakness. This could have significant implications for financial markets, borrowing costs, and overall economic growth.
The adjustments in inflation and unemployment forecasts indicate that the economic landscape is becoming increasingly challenging, which could affect consumer confidence and spending patterns moving forward.
What’s Next?
As the situation develops, market participants will closely monitor the Trump administration’s tariff announcements and their potential repercussions on the economy. The Federal Reserve’s response to rising inflation expectations and economic indicators will also be critical in shaping monetary policy for the remainder of 2025.
Investors and businesses should prepare for a potentially volatile economic environment, with heightened uncertainty surrounding trade relations and domestic economic performance. The outlook for consumer spending, business investment, and overall economic growth will depend on how these factors unfold in the coming months.
