Goldman Sachs Sounds the Alarm: Recession Risk Rises as Iran War Complicates Economic Outlook
Wall Street giant Goldman Sachs has significantly increased its recession probability forecast for the next 12 months, now estimating a 25% chance of economic contraction. This revised outlook comes amid a weakening labor market and escalating geopolitical tensions stemming from the conflict in Iran, creating a complex economic landscape.
The Weakening Labor Market: A Key Concern
February’s payrolls report revealed a decline of 92,000 jobs, a figure described by Goldman Sachs economist David Mericle as a “reminder that job growth is still too low.” The bank’s assessment of underlying job creation barely exceeds the level needed to accommodate new entrants into the workforce. The unemployment rate has as well risen, reaching 4.44% last month, and is projected to climb to 4.6% by the third quarter.
A revision to the labor force participation rate, reflecting a larger-than-previously-counted number of retirees, further underscores the softening of the workforce.
Iran War and the Oil Price Shock
The conflict in Iran has introduced significant volatility into the economic equation, particularly through its impact on oil prices. Goldman Sachs forecasts Brent crude averaging $98 per barrel in March and April, before potentially retreating to $71 by year-complete. Still, a disruption to the Strait of Hormuz could send prices soaring to $110, pushing headline inflation towards 4.5% this spring.
Even under the baseline forecast, Goldman has raised its headline PCE inflation forecast to 2.9% by December.
Tariffs Add to Inflationary Pressures
Existing tariffs implemented by the current administration are already contributing to inflationary pressures. Goldman estimates these tariffs have added over 70 basis points to core inflation. Removing the impact of tariffs reveals a more contained underlying inflation picture, with core CPI near 1.75% and core PCE near 2.25%.
The Fed’s Dilemma: A Stagflationary Squeeze
The Federal Reserve faces a challenging situation. The softening labor market might typically warrant easing monetary policy, but rising inflation, driven by oil prices and tariffs, argues for restraint. Goldman Sachs has pushed back its expectations for the first two rate cuts of 2026 to September and December, acknowledging that a higher inflation path will complicate the timing of any easing.
Reasons for Cautious Optimism Remain
Despite the heightened risks, Goldman Sachs maintains that a recession is not the most likely outcome. The bank points to solid productivity growth, averaging 2.2% annualized, as a positive sign. Cooling shelter inflation, with new lease rent growth near zero, is also expected to contribute to lower overall inflation. The potential for earlier Fed intervention if the labor market weakens further provides a built-in policy cushion.
While first-quarter GDP growth is currently tracking at 3.3%, this figure includes a temporary boost from the resolution of the previous government shutdown. Growth is expected to decelerate to around 2.0% in Q2, 1.9% in Q3, and 1.9% in Q4.
FAQ
Q: What is Goldman Sachs’ current recession probability?
A: 25% for the next 12 months.
Q: What is driving up inflation?
A: The conflict in Iran (and resulting oil price increases) and existing tariffs.
Q: When does Goldman Sachs now expect the Fed to cut interest rates?
A: September and December of 2026.
Q: Is a recession inevitable?
A: No, Goldman Sachs’ base case is continued growth, though risks are elevated.
Did you understand? A sustained 10% increase in oil prices can boost the inflation rate by 0.2 percentage points.
Pro Tip: Maintain a close eye on oil price fluctuations and labor market reports for early indicators of economic shifts.
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