Goldman Sachs raises recession odds to 25%. Here’s how Trump’s war economy is hitting jobs
Goldman Sachs has issued a fresh warning that the U.S. economy is deteriorating, with the conflict in Iran exacerbating the situation. The bank increased its 12-month recession probability to 25% on Thursday—up 5 percentage points—following a dismal February jobs report and rising oil prices that compelled economists to revise their projections.
This represents a notable warning from Wall Street’s most closely monitored research team, arriving at a time when the Trump administration’s dual gambles—on tariffs and Middle East military involvement—are intersecting with a labor market that was already displaying vulnerabilities.
The employment figure that shook Wall Street
February payrolls declined by 92,000—a figure that Goldman economist David Mericle described as a “reminder that employment growth remains insufficient.” The bank’s assessment of underlying job creation stands only marginally above zero, lagging behind the 70,000 jobs-per-month threshold required merely to match new workforce entrants. Additionally, job openings continue to decline.
The unemployment rate rose to 4.44% last month, and Goldman now anticipates it will climb to 4.6% by the third quarter. An atypical adjustment to the labor force participation rate—decreasing by 0.4 percentage points, due to revised Census data indicating a larger number of retired Americans than previously estimated—further illustrated the weakening labor market.
Oil emerges as a new uncertainty factor
The conflict in Iran has introduced a highly unpredictable element into an already complex economic landscape. Goldman’s baseline projection shows Brent crude averaging $98 per barrel in March and April, then falling back to $71 by year-end. In a worst-case scenario—a one-month closure of the Strait of Hormuz—Brent prices could surge to $110, driving headline inflation to a spring peak of nearly 4.5%.
Even under the baseline scenario, Goldman has increased its headline PCE inflation projection by 0.8 percentage points to 2.9% by December.
Tariff impacts are already evident in the data
Goldman estimates that Trump’s tariffs have already contributed more than 70 basis points to core inflation. Excluding those tariff impacts, underlying inflation appears significantly more restrained—core CPI around 1.75% and core PCE near 2.25%—indicating the policy is exerting considerable inflationary pressure.
The Federal Reserve faces a dilemma
Interest rate reductions are not expected in the near future. Goldman has delayed its two anticipated 2026 rate cuts to September and December, with the bank observing that “an elevated inflation trajectory will complicate the Fed’s ability to cut rates soon.” The Federal Reserve confronts a classic stagflationary bind: a labor market sufficiently weak to support monetary easing, but an inflation outlook—propelled by oil and tariffs—that warrants caution.
Some remain cautiously optimistic
Admittedly, a 25% probability of recession still indicates that Goldman’s baseline scenario is ongoing expansion—and the firm’s own data provides grounds for measured optimism. Productivity growth has averaged a robust 2.2% annualized rate during this cycle, which Mericle views as a return to the U.S. historical norm following years of subpar performance after the financial crisis. Housing inflation is also moderating considerably, with new lease rental growth at nearly zero year-over-year, which Goldman predicts will pull overall shelter costs down from 3.1% to 2.3% by December. Furthermore, Goldman itself acknowledges that if the labor market deteriorates further, the Fed would probably implement earlier rate cuts—offering an automatic policy buffer that was absent in previous downturns.
First-quarter strength appears temporary
Goldman is monitoring first-quarter GDP growth at 3.3%, though 1.3 percentage points of that stems from the temporary lift provided by the resolution of last fall’s government shutdown. For Q2 through Q4, the bank forecasts growth slowing to approximately 2.0%, 1.9%, and 1.9% respectively—a trajectory approaching stall speed.
For this story, journalists utilized generative AI as a research aid. An editor confirmed the accuracy of the information prior to publication.