30%! Goldman Sachs raises probability of U.S. recession

# Long Yue

Source: Wallstreetcn

Goldman Sachs has raised the probability of a U.S. recession over the next 12 months to 30% and forecasts that GDP growth will slow to 1.25%–1.75% in the second half of the year. Affected by elevated energy prices, the bank has lifted its year-end core PCE inflation forecast to 2.5%, with the unemployment rate potentially rising to 4.6%. Although the bond market has recently shifted to pricing in rate hikes, Goldman Sachs believes the market has overreacted. It maintains its baseline forecast of two rate cuts in September and December this year, and warns that recession risks could trigger more aggressive monetary easing.

Amid energy market turmoil and tighter financial conditions driven by geopolitical conflicts, Goldman Sachs has increased its 12-month U.S. recession probability to 30%.

In a new report, Jan Hatzius, Goldman Sachs’ Chief Economist, and his team noted that a prolonged closure of the Strait of Hormuz would push energy prices higher, weighing on economic growth and boosting inflation. The bank expects U.S. annualized GDP growth to fall below its potential trend of 1.25% to 1.75% in the second half of the year.

Recent data from the Federal Reserve Bank of Atlanta confirms the growth slowdown. Dragged down by declines in residential and non-residential fixed investment as well as falling private inventories, the Atlanta Fed’s GDPNow model has slashed its first-quarter GDP growth forecast sharply from 3.2% to 2.0%.

Amid rising inflation expectations, the bond market has quickly shifted to pricing in interest rate hikes. However, Goldman Sachs argues that markets have overreacted, sticking to its call for two rate cuts this year, and cautioning that recession risks could prompt more aggressive easing.

## Energy Shocks and Fiscal Fade to Weigh on Second-Half Growth

Goldman Sachs’ commodity strategists expect the Strait of Hormuz to remain closed until mid-April. This will delay the peak in Brent crude prices and slow the subsequent decline, as strategic reserves and other inventories will need to be rebuilt.

Hatzius’ team pointed out that while the negative energy shock to the U.S. remains relatively manageable, the economy faces two major cyclical headwinds in the second half.

“First, the growth boost from last summer’s fiscal legislation—including middle-class tax cuts and full expensing for manufacturing investment—will likely fade in the second half,” Goldman Sachs said in the report.

Second, the conflict has already tightened financial conditions by roughly 60 basis points. Goldman Sachs estimates that if this persists, it will subtract about 0.5 percentage points from second-half economic growth.

## Unemployment Risks Tilt Higher; AI May Exacerbate Labor Weakness

Growth running below the 2.3% potential trend will feed directly into the labor market.

Goldman Sachs projects the U.S. unemployment rate will rise to 4.6% under its baseline energy price scenario, and could reach 4.8% to 4.9% in a severe adverse scenario.

Notably, the bank warned about the potential impact of artificial intelligence (AI) on employment. “Although the labor market impact of AI remains modest so far, we expect it to intensify in 2026 and beyond.”

The report emphasized that past automation cycles typically accelerated sharply during recessions, as firms faced greater pressure to find efficiency gains. This trend could resonate with cyclical labor market weakness, leading to a steeper rise in the unemployment rate.

Against these factors, Goldman Sachs has nudged up its 12-month forward recession probability to 30%, returning to levels seen in the second half of 2025.

## Bond Market Overpriced; Goldman Sachs Sticks to Two 2026 Rate Cuts

On the inflation front, assuming a 0.25 percentage point impact from energy prices, Goldman Sachs has revised up its year-end core PCE inflation forecast to 2.5%. This still implies core inflation will decline by 50 basis points from current levels.

Goldman Sachs noted that tariffs contributed 76 basis points to core PCE inflation through February 2026. This represents a one-off price-level effect that is expected to drop out of year-over-year comparisons in the coming months.

Shifting inflation expectations have triggered sharp volatility in bond markets. Hatzius’ team argued that the bond market’s swing from pricing in 60 basis points of rate cuts in 2026 on February 27 to pricing in 5 to 10 basis points of hikes by March 20 constitutes an overreaction.

“Given our outlook for employment and core inflation, we still view two 25-basis-point rate cuts—in September and December—as appropriate in our baseline scenario,” Goldman Sachs said.

The bank emphasized that the larger tail risk at present is a recession or near-recession, which would trigger much deeper rate cuts. As a result, Goldman Sachs’ probability-weighted path for the federal funds rate is roughly 100 basis points lower than market pricing one year from now.

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