The world’s largest economy is forecast to outperform economist expectations again next year, according to Goldman Sachs Research.
“The US economy is in a good place,” writes David Mericle, chief US economist in Goldman Sachs Research. “Recession fears have diminished, inflation is trending back toward 2%, and the labor market has rebalanced but remains strong.”
Goldman Sachs Research predicts US GDP will grow 2.5% on a full-year basis. That compares with 1.9% for the consensus forecast of economists surveyed by Bloomberg.
Three key policy changes following the Republican sweep in Washington are expected to affect the economy, Mericle writes in the team’s report, which is titled “2025 US Economic Outlook: New Policies, Similar Path.”
How will Trump’s policies impact the US economy?
While the expected policy changes under President elect Donald Trump may be significant, Mericle doesn’t project that they will substantially alter the trajectory of the economy or monetary policy.
“Their impact might appear most quickly in the inflation numbers,” Mericle writes. Wage pressures are cooling and inflation expectations are back to normal. The remaining hot inflation appears to be lagging “catch up” inflation, such as official housing prices catching up to the levels reflected by market rents for new tenants.
Goldman Sachs Research forecasts that core PCE inflation, excluding tariff effects, will fall to 2.1% by the end of 2025. Tariffs may boost this measure of inflation to 2.4%, though it would be a one-time price level effect. Our economists’ analysis of the impact of the tariffs during the first Trump administration suggests that every 1 percentage point increase in the effective tariff rate would raise core PCE prices by 0.1 percentage points.
“While we have yet to see definitive evidence of labor market stabilization, trend job growth appears to be strong enough to stabilize and eventually lower the unemployment rate now that immigration is slowing,” Mericle writes. The economy was able to grow faster than Goldman Sachs Research’s estimate of potential GDP growth over the last two years, in part because a surge in immigration boosted labor force growth. Next year, a tightening job market is expected to replace the role of elevated immigration.
Policy changes, meanwhile, are anticipated to have roughly offsetting effects on economic expansion over the next two years. “The drag from tariffs and reduced immigration will likely appear earlier in 2025, while tax cuts will likely boost spending with a longer delay,” Mericle writes.
Policy changes are likely in other areas too, such as a lighter-touch approach to regulation. But the effects are expected to occur mainly at an industry level rather than a macroeconomic level.
How likely is a US recession?
“Recession fears have faded as the downside risks that had worried markets failed to materialize,” Mericle writes. There’s 15% chance of US recession in the next 12 months, according to Goldman Sachs Research, which is roughly in line with the historical average.
“Consumer spending should remain the core pillar of strong growth, supported both by rising real income driven by a solid labor market and by an extra boost from wealth effects,” Mericle writes. “And business investment should pick back up even as the factory-building boom fades.”
There are risks to the economy, however. A 10% universal tariff, which would be many times the size of the China-focused tariffs that unnerved markets in 2019, would likely boost inflation to a peak of just over 3% and hit GDP growth.
Markets could become concerned about fiscal sustainability at a time when the debt-to-GDP ratio is nearing an all-time high, the deficit is much wider than usual, and real interest rates are much higher than policymakers anticipated during the last cycle.
The outlook for the Fed during the Trump administration
Goldman Sachs Research expects the Federal Reserve to continue to cut the funds rate down to a terminal rate of 3.25-3.5% (the policy rate is 4.5% to 4.75% now), which would be 100 basis points higher than in the last cycle.
That’s because our economists expect the Federal Open Market Committee to continue nudging up its estimate of the neutral rate (typically considered the interest rate that neither stimulates nor slows the economy). In addition, non-monetary policy tailwinds — in particular, large fiscal deficits and resilient risk sentiment — are offsetting the impact of higher interest rates when it comes to demand.
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