March 21st, 2025
Goldman Sachs Research and others have revised their forecast for U.S. economic growth, predicting a slower expansion than previously expected. The updated GDP growth estimate for the fourth quarter of 2025 is 1.7%, down from 2.2%, reflecting the impact of rising tariffs and the Trump administration's trade policies. U.S. Treasury Secretary Scott Bessent remarked on Sunday that there are "no guarantees" against a recession and with a weaker than expected February jobs report and consumer spending showing signs of caution, there are concerns around slowing economic growth.
The administration has signaled that it may accept slower growth to implement its tariffs. The U.S. tariff rate is expected to increase by 10 percentage points this year, a significant rise compared to previous years. Notably, tariffs on critical goods, autos, and reciprocal tariffs related to Europe’s VAT could further raise the tariff rate.
The economic impact of these tariffs is expected to manifest in three ways: higher consumer prices, tighter financial conditions, and delayed business investment. Goldman believes these effects will subtract around 0.8 percentage points from GDP growth in the next year. The tax cuts and regulatory easing may provide some offset, but only a small portion. Consumer spending makes up about 70% of GDP.
Additionally, there is an expectation that there will be a rise in core PCE inflation to 3%, driven by the tariffs, though the inflation boost is expected to be temporary. Despite the downgrade in growth, the Federal Reserve is still expected to cut interest rates twice this year, in June and December, as it waits for more clarity in the economic outlook. Wait and see is the emerging narrative as the 10 Year UST remains rangebound currently sitting at 4.25% and Fed Chair Jay Powell called for "greater clarity." If the labor market shows signs of weakening the Fed may resume interest rate cuts but at what pace remains to be seen.
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