How tariffs will impact the US economy

Episode Summary

Executive Summary: Goldman Sachs chief U.S. economist David Maracle said tariffs now in effect are adding about 3 percentage points to the U.S. effective tariff rate, but the bigger shift is Goldman’s expectation for more tariffs ahead, taking the total increase to about 10 points. That raises inflation, lowers growth, increases recession odds modestly, and likely shifts the Fed toward insurance cuts rather than normalization cuts.

Main Topics: Tariff outlook and revised assumptions (Priority: 5/5): Maracle explained that while tariffs already enacted were broadly in line with expectations, Goldman sharply raised its forecast for additional tariffs, including critical imports, reciprocal tariffs, and possibly autos. Inflation effects and price-level risk (Priority: 5/5): The discussion focused on tariffs pushing core PCE higher, with inflation now expected to end the year just under 3% instead of falling toward 2.1%. He noted tariff impacts are still one-time to the price level, but expectations may matter more this time. Growth slowdown and stagflation concerns (Priority: 4/5): Goldman cut 2025 GDP growth because tariffs act like a tax on income, tighten financial conditions, and discourage business investment. Maracle said the term stagflation is directionally relevant but overstated versus 1970s-style stagflation. Recession risk and policy willingness (Priority: 4/5): The recession probability was raised slightly, reflecting greater policy risk. Maracle suggested the White House appears more willing than in Trump’s first term to accept economic and political downside from tariffs. Fed reaction function and rate cuts (Priority: 5/5): The conversation covered how tariffs could affect Fed policy, with markets now pricing more cuts. Goldman still expects two cuts this year and one next year, but the path could be driven by insurance cuts if growth weakens. Uncertainty, investment, and hiring decisions (Priority: 4/5): Maracle argued tariff uncertainty is more damaging now than in 2019 because tariffs are larger and broader, potentially affecting more countries, more sectors, and both input and output channels for U.S. firms. What to watch in coming data (Priority: 3/5): He highlighted business confidence, capital spending plans, hiring, and hard data on investment as the key indicators to judge whether tariffs and policy uncertainty are already biting the economy.

Key Arguments: Tariffs already in effect lift the effective U.S. tariff rate by about 3 percentage points, but Goldman now expects a total increase of about 10 percentage points as more measures are added. The inflation impact is expected to be meaningful but mostly one-time, with core PCE ending 2025 just under 3% rather than falling into the low twos. Higher tariffs reduce growth through lower real disposable income, tighter financial conditions, and weaker business investment. Calling the environment 'stagflation' is misleading in a 1970s sense, but the direction is still higher inflation and lower growth. Recession risk rose only modestly from 15% to 20% because the White House can still stop or reverse policies if data weaken. The Fed is less likely to cut rates because inflation is high; if cuts come, they are more likely to be insurance cuts than normalization cuts. Tariff uncertainty may be more damaging than in 2019 because proposed measures are broader, larger, and could trigger retaliation from many countries, affecting more sectors including services. Business confidence and investment have already been fragile, so tariff and policy uncertainty could soon show up in hiring and capex data.

Data Points: Effective tariff rate increase now in effect: ~3 percentage points - Goldman’s estimate of tariffs already implemented Prior expected tariff increase: 4-5 percentage points - Goldman’s earlier forecast before revising expectations upward New expected tariff increase: ~10 percentage points - Goldman’s revised baseline for total effective tariff rate increase Core PCE inflation without tariffs: 2.65% to ~2.1% by year-end - Baseline inflation path if there were no tariffs this year Core PCE under prior tariff assumptions: mid-2% range - Earlier expectation under more moderate tariffs Core PCE under new tariff assumptions: just short of 3% - Revised inflation forecast with larger tariff impact 2025 GDP forecast: 1.7% - Q4/Q4 GDP growth forecast after revision Previous 2025 GDP forecast: 2.2% - Earlier Q4/Q4 GDP growth forecast GDP forecast revision: -0.5 percentage points - Growth cut reflecting larger tariff impact 12-month recession probability: 20% - Raised from prior estimate due to policy risk Prior 12-month recession probability: 15% - Goldman’s earlier recession estimate Fed cuts expected: 2 cuts in 2025, 1 cut in 2026 - Goldman’s unchanged rate forecast Market pricing for Fed cuts: 3 cuts in 2025 - What markets were pricing at the time of the discussion Episode recording date: Monday, March 10th - Shown in the closing disclaimer

Pivotal Quotes: "With our new baseline of a 10 percentage point increase in the effective tariff rate, we think that means inflation actually runs closer to 3% despite those offsetting disinflationary pressures." — David Maracle: On how larger tariffs change the inflation outlook "The effect of the larger tariffs is to push inflation higher and growth lower." — David Maracle: On the macroeconomic tradeoff from tariffs "I do think the uncertainty is potentially more problematic this time." — David Maracle: On why tariff uncertainty may weigh more heavily than in 2019

Implications: Tariffs are now a macro risk, not just a trade issue: they may keep inflation elevated, slow growth, and make Fed cuts more likely only if weakness becomes clear. Businesses should watch confidence, capex, and hiring closely.