Goldman Sachs Raises U.S. Recession Probability to 45% Amid Trade Tensions

Goldman Sachs has significantly revised its economic outlook for the United States, citing escalating trade tensions and the potential for a recession. The investment bank's economists, led by Chief Economist Jan Hatzius, have increased the probability of a U.S. recession within the next 12 months to 45%, a 10 percentage point increase from previous estimates. This revision comes as the Trump administration's tariff policies continue to ripple through the global economy, creating uncertainty and potential disruptions in supply chains.

The report highlights three core issues driving this heightened risk: an unexpectedly tight financial environment, escalating retaliatory measures from international trade partners, and increasing uncertainty in policy direction. These factors could lead to a more significant suppression of capital expenditures than previously anticipated. The report warns that if the tariff measures scheduled to take effect on April 9 are fully implemented, along with potential expansions to other industries, the effective U.S. tariff rate could surge by 20 percentage points, far exceeding the 15 percentage point benchmark assumed in current models. In such an extreme scenario, the report suggests that the baseline forecast may need to be adjusted to reflect an economic recession.

In response to these economic headwinds, Goldman Sachs predicts that the Federal Reserve will initiate a rate-cutting cycle in June, a month earlier than previously expected. Under the baseline scenario, where some tariffs are temporarily delayed, the Federal Reserve is anticipated to implement three consecutive rate cuts of 25 basis points each, bringing the federal funds rate target range to 3.5%-3.75%. If the economy enters a recession, the rate cuts could total 200 basis points, with the annual cumulative reduction increasing from 105 basis points to 130 basis points, aligning with current market expectations.

The report underscores the broader implications of tariff policies, which not only directly increase import costs but also erode business investment confidence through expectations channels. The potential for a "policy tightening-investment cooling" negative feedback loop is a significant concern, as reduced capital expenditures could exacerbate economic downturns. The report emphasizes the need for proactive monetary policy adjustments to mitigate these risks and stabilize the economy.

The escalating trade tensions, particularly between the U.S. and China, have created a persistent source of economic uncertainty. The imposition of tariffs on a wide range of goods has disrupted international trade flows and forced companies to reassess their supply chain strategies. This has led to a slowdown in manufacturing activity and a decline in business investment, both of which are critical components of economic growth. The heightened risk of a recession has prompted calls for monetary policy adjustments to support economic stability.

Goldman Sachs' revised outlook reflects growing concerns among economists about the potential economic impact of the trade war. The investment bank's economists have been closely monitoring the situation and have concluded that the risks to the economy are significant enough to warrant an earlier start to the rate-cutting cycle. The decision to cut rates in June, rather than July, reflects a proactive approach to managing the economic risks posed by the trade war. However, the effectiveness of monetary policy in addressing the underlying issues remains a subject of debate. While rate cuts can provide short-term relief, they do not address the structural challenges posed by the trade war. Economists and policymakers are exploring comprehensive strategies that combine monetary and fiscal measures to support economic growth and stability. The situation remains fluid, and the outlook for the U.S. economy will continue to evolve as trade negotiations progress and the impact of tariffs becomes clearer.