Is a recession still in the cards?
Economists at Goldman Sachs have updated their projections for the gross domestic product (GDP) in 2025, based largely on tariffs.
Goldman Sachs now projects the GDP to grow at a 1.25% clip this year, up from their previous projection of 1% GDP growth.
The reason for the slightly sunnier outlook is that they see tariffs having a smaller effect on the economy than initially thought, explained Goldman Sachs Chief US economist David Mericle in a report posted by the firm last week.
Goldman Sachs maintains that the effective tariff rate will ultimately rise by about 14 percentage points, which is unchanged from past projections.
However, recent inflation readings are showing that the tariffs are having a slightly smaller impact on consumer prices than previously expected. That, in turn, translates to a lower impact on real income and consumer spending, thus slightly better economic growth.
Further, Mericle said financial conditions, broadly, have returned to pre-tariff levels, and trade policy uncertainty has moderated a bit as trade partners have moved toward de-escalation.
What are the odds of a recession?
Goldman Sachs economists also lowered their odds of a recession in the U.S. to 30%, from the previous 35%. Back in April, after the tariffs were first announced, Goldman Sachs had the odds of a recession at 45%.
A recession is generally defined as two consecutive quarters of negative GDP. With the economy shrinking 0.3% in the first quarter, a negative GDP in the second quarter would technically constitute a recession. The Q2 GDP doesn’t come out until July 30, so we won’t know until then.
But based on the latest estimate from the Atlanta Fed’s GDP Now tracker, a recession looks unlikely, at least for now. The GDP Now tool anticipates GDP growth to be 3.4% in Q2. This is in no way an official projection, but the Atlanta Fed did correctly forecast negative GDP growth in Q1, so it is a fairly good barometer.
In addition, Goldman Sachs now projections the year-end unemployment rate to be 4.4%, which is own a tick from the previous estimate of 4.5%.
In addition, Goldman Sachs economists only anticipate one federal funds rate cut this year, with the one coming in December. That would be followed by two more in 2026 to drop the rate to a range of 3.5% to 3.75% by the end of 2026.
