In a recent client note, Goldman Sachs’ chief economist Jan Hatzius warns that the escalation of tariffs under President Trump is likely to exert significant downward pressure on the U.S. economy. After a 0.5% annualized contraction in gross domestic product during the first quarter, despite a modest 0.5% increase in consumer spending, Goldman projects that GDP growth will slow to roughly 1.1% through 2025.
The bank attributes much of this slowdown to tariff-driven price increases that erode real incomes. Higher import taxes raise costs for both goods and intermediate inputs, which in turn pushes up prices for consumers and businesses. As real purchasing power declines, household spending — the main engine of U.S. growth — has shown pronounced weakness. Goldman notes that consumer spending has effectively stalled over the past six months, a pattern normally observed during economic downturns rather than in healthy expansions.
Under Goldman’s baseline forecast, a cycle of reciprocal tariffs between the United States and trading partners would raise the average effective tariff rate by about 14 percentage points this year, with a further increase of roughly 3 points expected in 2026. Those higher trade barriers would reverberate through the economy: raising costs for firms, squeezing profit margins, and reducing real wages and disposable income for households. The net effect is weaker demand and slower growth.
Goldman also forecasts an impact on inflation. Core personal consumption expenditures (PCE) inflation, which excludes volatile food and energy prices and is closely watched by the Federal Reserve, is expected to peak at about 3.3% in 2025 as tariff-driven price pressures persist. After that peak, the firm anticipates a gradual moderation in inflation back toward the Fed’s 2% objective over the subsequent two years, as demand softens and supply adjustments take effect.
The report highlights two key mechanisms through which tariffs influence the macroeconomy. First, direct price effects: higher import duties raise the domestic prices of affected goods, reducing real incomes for consumers who must pay more for the same items. Second, indirect effects: increased costs for intermediate inputs raise production costs for domestic firms, which may pass some of those costs on to consumers or absorb them through lower margins and reduced investment. Both channels weigh on growth by depressing consumption and business capital spending.
Goldman’s outlook implies a period of slower expansion and elevated inflation relative to the Fed target in the near term. Policymakers and market participants will need to weigh these trade-offs when evaluating fiscal and monetary responses. A sustained tariff regime that narrows global supply options and raises costs could complicate efforts to return inflation to target without further dampening output and employment.
In sum, Goldman Sachs’ analysis suggests that tariff escalation poses a meaningful headwind to the U.S. economy: it reduces real incomes, undercuts consumer spending growth, lifts near-term inflation, and contributes to a slower growth trajectory through 2025. The forecast underscores the potential macroeconomic consequences of sustained trade tensions and highlights the sensitivity of household spending to changes in real purchasing power.