Why the US economy may grow more slowly than expected

The US economy may expand more slowly than previously forecast as tariffs on imports rise and the Trump administration signals that it may tolerate slower growth in order to implement its trade policies, according to Goldman Sachs Research.

Our economists reduced their prediction for US GDP expansion to 1.7% in the fourth quarter of 2025 (year over year) from their earlier estimate of 2.2%. Goldman Sachs Research’s forecast for the world’s largest economy is, for the first time in more than two years, lower than the consensus estimate of economists surveyed by Bloomberg. 

“Our trade policy assumptions have become considerably more adverse and the administration is managing expectations towards tariff-induced near-term economic weakness,” Goldman Sachs Research Chief Economist Jan Hatzius writes in the team's report.

The average US tariff rate is expected to rise by 10 percentage points this year. That’s twice Goldman Sachs Research’s previous forecast and about five times the increase seen in the first Trump administration. While some import taxes have been softened, our economists expect levies in the coming months on critical goods, global autos, and a “reciprocal” tariff.

Reciprocal tariffs and the administration’s view of Europe’s 20% value added tax (VAT) are particularly important because the US considers the tax a tariff (even though Europe imposes it equally on imported and domestically produced goods). If applied mechanically, a reciprocal tariff that includes the effect of VAT could raise the average US tariff rate by 10 percentage points or more. Tariff carveouts will probably lower this number, but if the exemptions are less widespread than Goldman Sachs Research expects, the average tariff rate could rise as much as 15 percentage points.

What are the economic effects of tariffs?

Tariffs are likely to weigh on US economic growth via three main channels, according to Goldman Sachs Research.

• They raise consumer prices — and thereby cut real income — by an estimated 0.1% per 1 percentage point increase in the average US tariff rate. (In theory, the drag could diminish if the tariff revenue is recycled into additional tax cuts, but this revenue will not be scored in the ongoing budget negotiations if it results from executive as opposed to congressional action.)
• Tariffs tend to tighten financial conditions, although the impact in this cycle looks smaller than in the 2018-2019 trade war when scaled by the size of the tariff hikes.
• Trade policy uncertainty leads businesses to delay investment.

All told, the team’s new baseline implies that tariffs will subtract an estimated 0.8 percentage point from GDP growth over the next year, with only 0.1-0.2 percentage point of this drag offset by the (relatively slow-moving) boost from tax cuts and regulatory easing.

Will tariffs lead to higher inflation?

Goldman Sachs Research now expects core PCE inflation to reaccelerate to 3% later this year, up nearly half a percentage point from their 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 inflation-expectations measures from the University of Michigan and the Conference Board.

Given their downgrade to the forecast for US GDP growth, our economists still expect the Federal Reserve to make two 25-basis-point cuts to the fed funds rate this year (June and December). Goldman Sachs Research’s near-term view is that the Federal Open Market Committee will want to stay on the sidelines and make as little news as possible until the policy outlook has become clearer.

 

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