Goldman Sachs is forecasting a notable slowdown in US economic growth, citing the inflationary impact of rising tariffs and the resulting pressure on consumer spending.
According to a note to clients from the bank’s chief economist, Jan Hatzius, the firm expects gross domestic product (GDP) to increase at an annual rate of just 1.1% through 2025.
The projected drag on real income from higher prices is anticipated to outweigh the positive effects of looser financial conditions.
“Even a one-time price increase will eat into real income, at a time when consumer spending trends already look shaky,” Hatzius wrote.
While recent retail sales have shown resilience, Goldman believes overall spending stagnated during the first half of the year, something that rarely happens outside of a recessionary environment.
In the first quarter, GDP contracted at a 0.5% annualized pace, with consumer spending rising just 0.5%.
Tariff risks could push inflation higher
A key concern driving Goldman’s cautious outlook is the potential impact of President Donald Trump’s proposed tariffs.
The firm expects so-called reciprocal tariffs to reach an effective rate of 15%, up from a prior estimate of 10%.
This would result in a 14 percentage point increase in the average effective tariff rate in 2025, with an additional three-point rise projected for 2026.
These tariff-related price pressures are expected to push inflation higher in the near term. Goldman anticipates that core inflation, as measured by the Federal Reserve’s preferred personal consumption expenditures (PCE) price index, will rise to 3.3% in 2025.
Inflation is then expected to gradually moderate to 2.7% in 2026 and 2.4% in 2027, still above the Fed’s long-term 2% target.
As a result of these projections, Goldman places the probability of a recession at 30%, roughly double the typical baseline risk.
The firm also suggested that heightened tariff pressures could pose risks to employment and supply chains, potentially warranting more aggressive interest rate cuts than are currently expected.
Mixed economic signals complicate outlook
Despite the more cautious forecast, some indicators continue to show signs of underlying economic strength.
Consumer sentiment, as tracked by the University of Michigan, has rebounded from earlier lows experienced following Trump’s initial tariff announcement on April 2.
Inflation expectations have also receded, returning to levels seen before what some termed “liberation day.”
Additionally, the Federal Reserve Bank of Atlanta’s GDPNow model currently estimates second-quarter GDP growth at an annualized pace of 2.4%, indicating a stronger performance compared to the contraction seen in Q1.
Nonetheless, the outlook remains uncertain. Hiring has slowed but remains in positive territory, and while inflation is trending down, it continues to exceed the Fed’s 2% target.
As the economic impact of tariffs continues to unfold, Goldman Sachs expects the Federal Reserve to adopt a cautious, wait-and-see policy stance, while remaining prepared to adjust interest rates if conditions deteriorate further.
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