Goldman Sachs cuts forecast for US economy. Trump’s tariffs are to blame.

Goldman Sachs Chief Economist Jan Hatzius cut his 2025 U.S. GDP growth forecast to 1.7%, pointing to the impact of tariffs on the economy and consumers. At the start of this year, he was predicting 2.4% growth.

In a March 10 research note, Hatzius said “trade policy assumptions have become considerably more adverse and the administration is managing expectations toward tariff-induced near-term economic weakness.” He now expects the average U.S. tariff rate to rise by 10 percentage points this year, twice his previous forecast and about five times the increase seen in the first administration of President Donald Trump.

A day after Hatzius issued his research note, President Trump announced that an additional 25% tariff on Canadian steel and aluminum will go into effect on Wednesday. The policy change likely will result in higher prices for U.S. manufacturers that rely on Canadian imports.

Those tariffs join a burgeoning list of tariff increases that Trump has unveiled on roughly $1.4 trillion worth of goods coming from Canada, Mexico, and China. Those three countries are the U.S.’s largest trading partners. The president has temporarily paused some of the tariffs on Canadian and Mexican goods until April.

Hatzius notes that tariffs can dampen economic growth because they raise consumer prices and thereby cut real income. Tariffs also tend to tighten financial conditions, and trade policy uncertainty leads firms to delay investment, he writes. Hatzius estimates that tariffs will subtract 0.8 of a percentage point from GDP growth over the next year. Potential tax cuts and regulatory easing, which are seen as pro-growth, will only offset 0.1 to 0.2 percentage points of this drag, he says.

Tariffs may also spur inflation. Hatzius anticipates that the core Personal Consumption Expenditure price index (core PCE) may reaccelerate to 3% later this year, up nearly half a percentage point from his prior forecast. “In theory, a tariff hike raises the price level permanently but only raises the inflation rate temporarily. In practice, this hinges on the assumption that inflation expectations remain well-anchored, which looks a bit more tenuous following the pickup in the UMich and Conference Board inflation expectations measures,” he writes, referring to the University of Michigan’s consumer sentiment index, which shows sentiment souring.

Other economists and analysts have been revising their outlooks. For example, economists at JPMorgan Chase lowered their growth predictions and said there’s a roughly 40% chance of recession in the second half of the year.

Although Trump campaigned on implementing far-reaching tariffs, the president’s policy announcements seem to have caught investors off guard and sent markets tumbling. So far this year, the S&P 500 is down 5.1%, and the Nasdaq has fallen 9.7%. The selloff wiped out gains stocks made after Election Day when investors focused on aspects of the president’s agenda deemed more pro-growth, such as deregulation and tax cuts. Consumer discretionary and bank stocks, which are seen as economically sensitive, have been among the hardest hit.

Write to Andrew Welsch at andrew.welsch@barrons.com