How tariffs will impact the US economy

Tariff Expectations Revised Upward

• Effective tariff rates have already risen by approximately three percentage points, aligning with pre-election expectations for the period between Election Day and Inauguration Day.
• Goldman Sachs has increased its full-year forecast for the effective tariff rate increase from a previous expectation of 4–5 percentage points to a new baseline of approximately 10 percentage points.
• The upward revision is driven by initial tariff implementations on Canada and Mexico, potential tariffs on critical imports, meaningful reciprocal tariffs, and proposed tariffs on autos.

Inflation and Stagflation Dynamics

• Under a no-tariff scenario, core PCE inflation was projected to decline from 2.65% to roughly 2.1% by year-end; the new tariff baseline implies inflation will rise slightly to just under 3%.
• The inflationary impact is characterized as a one-time price level adjustment, though consumer and business expectations for inflation have jumped significantly due to heightened public alertness to tariff news.
• While growth forecasts are down and inflation forecasts are up, David Miracle characterizes the "stagflation" label as misleading for the U.S. context, noting current conditions lack the double-digit inflation and labor market collapse seen in the 1970s.

Growth Forecasts and Recession Risks

• Goldman Sachs cut its 2025 GDP growth forecast (Q4-Q4) from 2.2% to 1.7% to account for the expanded tariff impact.
• The reduction in growth is attributed to three specific channels: a tax-like reduction in real disposable income, tighter financial conditions evidenced by equity market sell-offs, and increased uncertainty discouraging business investment.
• The probability of a recession within the next 12 months was raised from 15% to 20%, contingent on the White House proceeding with policies that could further weaken economic data.
• Unlike the first Trump administration, the current administration appears more willing to accept economic and political risks associated with higher consumer prices.

Federal Reserve Policy Outlook

• Goldman Sachs maintains a forecast of two rate cuts this year and one cut next year, diverging from current market pricing which anticipates three cuts this year.
• With inflation near 3%, the threshold for the Fed to execute "normalization cuts" (driven by disinflation) is considered too high; any future cuts are more likely to be "insurance cuts" triggered by signs of economic weakness.
• The bar for insurance cuts is higher now than in 2019 because inflation expectations are currently elevated, requiring more substantial evidence of deteriorating consumer confidence, business sentiment, or hard economic data to justify intervention.
• The Fed is currently inclined to pause policy adjustments until policy uncertainty surrounding the White House's tariff trajectory resolves.

Investment and Uncertainty Analysis

• David Miracle asserts that trade policy uncertainty poses a more significant risk to business investment and hiring this time around compared to 2019.
• This increased risk stems from the larger scale of proposed tariffs and the broader scope of potential retaliation from multiple foreign governments affecting both U.S. inputs and output markets, including the services sector.
• Key indicators for monitoring include business confidence surveys, capital spending expectations, and hiring data in healthcare and government sectors, which face uncertainty from both trade policy and proposed government spending cuts.

Business Sentiment Context

• Despite recent tariff threats, business confidence remains above pre-election levels and higher than the recession fears of the previous few years, though a step-down in confidence is expected following the latest tariff announcements.
• Goldman Sachs notes that fear of an impending recession may have deterred investment as significantly as current policy uncertainty.

Event and Recording Details

• This episode of Goldman Sachs Exchanges was recorded on Monday, March 10.
• Participants included host Alison Nathan and David Miracle, Chief U.S. Economist, joining from Doha.