Goldman Sachs Economist: Recession Odds at 45%, Not Base Case

Recession Outlook Shift

• 🎯 Goldman Sachs has revised its US recession forecast, moving it from a base case to a 45% probability.
• 💡 This change was prompted by the removal of previously proposed substantial additional tariffs, which would have significantly raised the US's effective tariff rate.
• ⚠️ While the immediate threat of large tariffs has receded, the odds of a recession remain high at 45%.

Impact of Tariffs

• 📈 The current tariff situation is described as potentially leading to a tariff rate at least 10 times higher than during the 2019 trade war.
• 📦 A significant tariff on China is expected to disrupt trade flows, though not entirely shut them down.
• 🌍 Companies are incentivized to reroute goods through other countries or utilize existing production networks in third countries to circumvent high tariffs.

Federal Reserve and Economic Data

• 📊 Goldman Sachs anticipates a modest GDP growth of 0.5% for the year, with a slight increase in the unemployment rate.
• 📉 This outlook suggests a need for a package of three 25-basis-point insurance cuts by the Federal Reserve, penciled in for June, July, and September.
• ⏳ The Fed will likely need to see hard economic data, such as May employment figures, before making cuts, though financial market conditions and survey data could influence an earlier decision.

Inflation and Fed Policy

• ⚠️ The bar for the Fed to cut rates is higher due to persistent inflation and strikingly high inflation expectations.
• 🗣️ However, Fed officials, including Chair Powell, have indicated that rising unemployment could still give them the liberty to cut rates, even with elevated inflation.
• ⚖️ While inflation raises the bar, it is not considered prohibitive for potential Fed rate cuts.