Goldman Sachs’ recession models are working overtime post Liberation Day tariff surprises.
With markets under severe pressure as they digest the penalizing impact of President Trump’s new tariffs, Goldman Sachs is back for the second time in a week with an increase in their recession risk probability.
The investment bank’s economists, led by Jan Hatzius, now see a 45% chance of a US recession in the next twelve months, up from 35% last week. Prior to that call, Goldman had been at a 20% recession probability risk.
Hatzius sees three factors driving his upgraded probability:
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Financial conditions have tightened “more aggressively” than Hatzius expected after the tariff news.
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Foreign tourism to the US has already started to weaken, amid potential boycotts.
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Measures of policy uncertainty have spiked to levels “far above” those seen during the last trade war.
At close: April 4 at 4:35:58 PM EDT
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The Federal Reserve will be forced to react to the recession says Hatzius, even if that means stomaching higher inflation.
“In our current non-recession baseline, we expect the Fed to deliver a package of three consecutive 25 basis point insurance cuts starting in June (vs. July previously), lowering the funds rate to 3.5-3.75%. In a recession scenario, we would instead expect the Fed to cut by around 200 basis points over the next year,” Hatzius adds.
Markets have shed an astounding $5.4 trillion in value in the two days since president Trump revealed big-time tariffs on major countries last Wednesday. The S&P 500 is now at its lowest level in 11 months, with pros saying the carnage may not yet be over.
Heavy selling continued in markets around the world on Monday.
Tokyo’s Nikkei 225 index tanked 7.8%. Hong Kong’s stock market nosedived about 12%, the worst day in more than 16 years. China’s Shanghai Composite Index lost 8.4%.
Futures on the Dow Jones Industrial Average dropped more than 1,100 points.
“In this moment, you need to play defense and focus on stability. Shift into stable, profitable sectors with signs of good financial standing,” Ritholtz Wealth Management chief market strategist Callie Cox told me.
Brian Sozzi is Yahoo Finance’s Executive Editor. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.
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