Goldman Sachs predicts a significant slowdown in US growth. They cite the inflationary effect of increasing tariffs, and the pressure this puts on consumer spending.
Jan Hatzius is the chief economist at the Bank of America. In a letter to its clients, Hatzius predicts that the gross domestic product will only increase by 1.1% annually through the year 2025.
It is expected that the negative effects of looser financial standards will outweigh any positive impact from rising prices.
Hatzius wrote that “even a single price hike will reduce real income at a moment when the consumer’s spending patterns already appear to be shaky.”
Goldman says that while recent retail sales are resilient, overall spending has stagnated in the first half of this year. This is something which rarely occurs outside of a downturn.
The first quarter GDP shrank by 0.5% on an annualized basis, while consumer spending only increased 0.5%.
Inflation could be pushed higher by tariff risks
Goldman’s caution is largely due to the impact that President Donald Trump’s tariff plans could have.
The company expects that so-called “reciprocal tariffs” will reach an actual rate of 15 percent, up from the previous estimate of 10 percent.
The average tariff rate would increase by 14 percentage points in 2025. An additional rise of three percentage points is projected in 2026.
In the short term, these tariff-related pressures on prices are likely to drive inflation up. Goldman expects core inflation to reach 3.3% by 2025, measured using the Federal Reserve’s PCE price index.
The Fed has set a long-term inflation target of 2%.
Goldman estimates that the likelihood of a global recession is 30%. This is roughly twice the normal baseline risk.
Firm also said that increased tariff pressures may pose risks for employment and supply chain, which could warrant more aggressive rate reductions than currently anticipated.
Mixed economic indicators complicate the outlook
Some indicators still show signs of economic strength despite the cautious outlook.
The University of Michigan has tracked consumer sentiment and found that it is rebounding from the lows seen following Trump’s first tariff announcement in April.
The expectations for inflation have also fallen, and are now back to the levels before “liberation Day,” as some refer to it.
The Federal Reserve Bank of Atlanta’s GDPNow Model estimates the second quarter GDP at an annualized rate of 2.4%. This is a better performance than the Q1 contraction.
The outlook is still uncertain. The hiring rate has decreased, but it is still positive. While inflation continues to trend down, the Fed’s target of 2% remains unmet.
Goldman Sachs believes that the Federal Reserve will adopt a conservative, watch-and-see approach, but remain prepared to increase interest rates in the event of a further deterioration.
As new information becomes available, this post Goldman Sachs warns US of slowing growth amid increasing tariff pressures could be updated.
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