Don’t look now, but Goldman’s forecast for US economic growth is below blue-chip consensus all of a sudden. That’s notable.
For more than two years, Jan Hatzius maintained a rosier-than-average view. But that changed on Monday, when he cut the bank’s 2025 US GDP forecast to 1.7% from 2.4%.
The problem’s not the data. Yet. And Hatzius called hand-wringing over current-quarter GDP nowcasting “greatly exaggerated.” He also said the world’s largest economy still has a lot going for it, including expectations for tax cuts and de-regulation.
So, what’s the issue? Tariffs. You know, “the most beautiful word in the dictionary,” to quote Donald Trump.
“The reason for the downgrade is that our trade policy assumptions have become considerably more adverse and the administration is managing expectations towards tariff-induced near-term economic weakness,” Hatzius said.
The figure on the left, above, just shows the evolution of Goldman’s US growth forecast versus consensus. The figure on the right illustrates the breakdown of Goldman’s tariff assumptions.
Goldman now expects the average US tariff rate to rise by 10ppt in 2025, double the bank’s previous forecast and, as Hatzius pointed out, “about five times the increase seen in the first Trump administration.”
Hatzius now expects The White House to impose an additional 10% levy on critical goods, a 25% global tariff on cars and the “reciprocal” tariff Trump’s touted repeatedly in recent days.
“The reciprocal tariff matters most,” Hatzius said. “Not because other countries impose much higher tariffs on the US than vice versa — with a few exceptions such as India they don’t — but because the administration views e.g. Europe’s VAT of 20% as equivalent to a tariff, even though it is imposed equally on imported and domestically produced goods.”
He went on to note, with some alarm, that if Trump were to calculate reciprocal tariffs without any VAT carveouts, “a VAT-inclusive reciprocal tariff alone could raise the average US tariff rate by 10ppt or more.”
“Analysts & strategists” assured us that stocks were bound to surge under Trump because he is business friendly. Deregulation and further business tax reductions beyond a mere extension of the expiring tax cuts would kickstart further private sector growth. Best of all, we can always count on a Trump Put because he rates his success on the trajectory of the Dow Jones Average.
We also were assured that Mr. Trump’s tariff threats could safely be ignored because they were mostly just negotiating gambits, with his first term record cited to justify that contention. His mass deportation promises were seen as something similar which also should be looked at in that light as bring a minor annoyance that he would not prioritize.
Those bullish arguments are unravelling one by one. Outside of banning DEI requirements. where is the massive deregulation we’ve been promised? Nor have further business tax cuts even been seriously proposed – instead we keep hearing about populist tax giveaways.
Add in the growing awareness that maybe, just maybe, the president no longer is solely obsessed with striking trade deals which would “level the playing field.” It is becoming clear that tariffs are now being used as a very blunt economic and foreign policy tool.
Then there’s that building lack of confidence in the Trump Put, though many street professionals and retail investors refuse to believe that he has walked away from that short-term focus even as he repeatedly says just that.
All this on top of a fully invested and levered up market specs and investors.
It’s not over – we have to see fewer headlines about this being a great buying opportunity for a really solid bottom to be put in. Or this that too much to hope for?
At some point Trump will read some mollifying words into a teleprompter and postpone some tariffs for a few weeks, while various cabinet members also say soothing things, but not until the insiders lay on trades to profit from the oversold bounce, which will last only until his next outburst but will be a good opportunity for the next round of derisking.
I’ve been wondering who in the know has been profiting from the big swings. I’m sure there are some pilot fish hanging around the Trump shark just waiting for a nice meal.