Goldman Sachs Cuts Q3 GDP Forecast to 1.6% Due to Trade Deficit Surge

Goldman Sachs has revised its forecast for the third-quarter U.S. economic growth, citing an unexpected expansion in the goods trade deficit. The firm's report highlights that while the core Personal Consumption Expenditures (PCE) price index for July met market expectations, the significant widening of the trade deficit has led to a downward adjustment in GDP growth projections.

The core PCE price index for July showed a month-on-month increase of 0.27% and a year-on-year rise to 2.88%, closely aligning with Goldman Sachs' previous forecast and broader market expectations. Core goods prices remained stable, while core services prices increased by 0.36% month-on-month. The market-based core PCE rose by 0.17% month-on-month, and core services prices excluding housing increased by 0.39% month-on-month, driven partly by increases in portfolio management and non-profit organization prices. The overall PCE price index increased by 0.20% month-on-month and 2.60% year-on-year, matching both Goldman Sachs' and market expectations.

On the household income and expenditure front, U.S. personal income grew by 0.4% month-on-month in July, driven by increases in employment compensation, owner income, rental income, and asset income. Personal spending also performed well, increasing by 0.5% month-on-month, slightly above Goldman Sachs' forecast. Inflation-adjusted real personal spending grew by 0.3% month-on-month, with real goods spending increasing by 0.9% and real services spending rising by 0.1% month-on-month. The savings rate remained at 4.4% in July, down from the previously reported 4.5% in June.

In the goods trade sector, there was a notable expansion in the trade deficit. The seasonally adjusted U.S. goods trade deficit widened by 187 billion to 1036 billion in July, far exceeding Goldman Sachs' forecast of 910 billion and the market expectation of 902 billion. U.S. goods exports decreased by 1 billion in July, while imports surged by 186 billion. This could be attributed to companies stockpiling ahead of the tariff policies set to take effect in August. The expansion in the trade deficit was primarily due to increased imports of industrial supplies and capital goods. On the export side, industrial supplies exports decreased, while capital goods exports increased.

Goldman Sachs emphasized that the unexpected widening of the goods trade deficit is the primary reason for the downward revision of the third-quarter GDP tracking estimate. The firm lowered its forecast for the third-quarter U.S. GDP growth by 0.2 percentage points to 1.6% on an annualized quarterly basis. This indicates that net exports will significantly drag on economic growth. However, indicators of domestic demand strength, such as domestic final sales, are expected to maintain a positive growth of 0.6%.