Goldman Sachs Annual Forecast: "Trump 2.0" Top Ten Key Issues

In 2025, will the U.S. GDP exceed expectations? Will inflation and the labor market continue to slow down?

On December 29, Goldman Sachs Chief Economist Jan Hatzius and his team released a report titled "U.S. Economics Analyst: 10 Questions for 2025," outlining the ten key themes that will impact the U.S. stock market next year, along with analyses and answers to related questions.

Hatzius and others emphasized the robust economic fundamentals at the start of the new year but also warned that uncertainties surrounding U.S. policy changes and geopolitical risks during Trump's second term could put pressure on the U.S. economic outlook.

1. Will GDP growth exceed general market expectations?

Yes. Hatzius and others expect the year-on-year GDP growth rate for the U.S. in 2025, calculated on a Q4/Q4 basis, to be 2.4%, slightly lower than Goldman Sachs' previous expectation of 2.5%, but still higher than the general market expectation of 2%. This growth is primarily driven by strong consumer spending, robust real income growth, and healthy business investment.

Hatzius also added that while the economic outlook for the U.S. next year is relatively positive, there are downside risks, mainly the return of trade tensions, which could trigger foreign tariff retaliation and increase uncertainty, thereby suppressing investment.

Additionally, Hatzius and others stated that policy changes under the Trump administration will put pressure on growth in 2025, but will provide a boost by 2026, roughly offsetting the growth pressure. The drag on the economy from reduced immigration and increased tariffs may become apparent sooner, while the stimulative effects of tax cuts will require legislative support, thus taking longer to materialize.

2. Will consumer spending growth exceed market expectations?

Yes. Hatzius and others expect consumer spending growth in the U.S. to reach 2.3% in 2025, consistent with 2023 and 2024. A key supporting factor is a healthy labor market, which is expected to allow real income for residents to grow at a stable rate of about 2.5%, covering all income levels.

Furthermore, Hatzius anticipates that the wealth effect will provide additional support for household spending—household financial conditions remain strong and are further improved by steady increases in stock prices.

3. Will the labor market continue to slow down?

No. Hatzius and others pointed out that while the U.S. labor market appears slightly weaker this year compared to previous years, it remains strong by historical and international standards. Many have been overly concerned about the Sam Rule triggered in July—after all, the number of job vacancies in the U.S. remains high, and there have been no signs of a layoff spiral (where unemployment leads to reduced consumption, further triggering unemployment).

However, Hatzius also noted that many people have too quickly assumed that the issues in the labor market have been resolved, while in fact, the latest data shows that the state of the U.S. labor market remains unclear, with the unemployment rate rising back to summer highs, while other indicators show preliminary but not definitive signs of stabilization In summary, Goldman Sachs believes that while the unemployment rate needs attention, they still expect the U.S. unemployment rate to decline to 4% by 2025 for three reasons:

1. Job vacancies are at a healthy level, and strong final demand growth should maintain robust growth in labor demand;
2. The main reason for the weakness in the labor market this year is the difficulty in fully absorbing the large influx of new immigrants into the labor market each month in the short term, a trend that has already significantly declined and will further slow down by 2025;
3. Federal Reserve Chairman Jerome Powell's remarks at the Jackson Hole meeting and the December Federal Open Market Committee meeting indicate that if the labor market weakens further, the Fed leadership may push for further rate cuts to support employment.

4. Will core Personal Consumption Expenditures (PCE) inflation fall below 2.4% year-on-year after excluding tariff effects?

Yes. Hatzius and others predict that U.S. inflation will continue to decline, approaching the Fed's 2% target by the end of 2025, with core PCE inflation excluding tariff effects expected to fall to 2.1%; if tariffs are included, inflation may slightly rise to 2.4%.

Hatzius added that the cooling of wage pressures, the easing of lagging inflation, and the stability of financial services are the main drivers of the cooling inflation.

5. Will the Federal Reserve cut rates by at least another 50 basis points?

Yes. Goldman Sachs expects the Fed to cut rates in March, June, and September 2025, with three additional rate cuts at a quarterly or every-other-meeting frequency.

Although Hatzius and others believe that some Fed officials seem reluctant to cut rates, and the risks and actual impacts of tariffs may limit the Fed's room to cut rates next year, Goldman Sachs' baseline forecast and probability-weighted forecast are both more dovish than market pricing for two reasons:

1. Goldman Sachs believes inflation is declining and expects the core PCE year-on-year rate to drop by nearly 0.3 percentage points by the Fed meeting in March next year;
2. Goldman Sachs believes that the impact of policy changes during Trump's second term on inflation is moderate, and overall interest rates will continue to decline. Moreover, aggressive policy changes may bring two-way interest rate risks; for example, in 2019, the Fed prioritized employment risks over one-time inflation shocks after tariffs triggered financial conditions tightening, thus implementing a 75 basis point "insurance rate cut."

6. Will the Fed's estimate of the neutral interest rate be raised from 3% to at least 3.25%?

Yes. Goldman Sachs previously pointed out that Fed FOMC members will raise their estimates of the neutral interest rate over time, as market pricing and the econometric models summarized by Fed staff predict levels much higher than the current estimates of FOMC members. Since then, the median long-term interest rate estimate of FOMC members has risen from 2.5% to 3%.

Hatzius stated that this estimate may be further raised in 2025, as Goldman Sachs' latest model update shows that the range for the neutral interest rate is 2.8%-4.6%, with a nominal average of 3.8%, while market pricing is even higher. **

7. Will Trump seek to fire or demote Powell?

No. During his first term, Trump repeatedly expressed a desire to fire Powell and find someone who could lower interest rates to replace him, while the FOMC has indicated that it does not expect to cut rates at the meeting in January next year—if this is the case, it will undoubtedly exacerbate tensions between the White House and the Federal Reserve.

However, Hatzius and others believe that Trump is unlikely to fire or demote Powell for two reasons:

1. Trump's first term has proven that a president cannot arbitrarily fire the Federal Reserve Chair, as the law only allows for removal for "just cause," and it is unlikely that a court would find "failure to cut rates" to be just cause for removal;
2. Powell's term ends in 2026, and the White House may start considering candidates for the Federal Reserve Chair in the second half of 2025, so the waiting time is not long.

8. Will net immigration turn negative?

No. Goldman Sachs stated that after Trump takes office, the White House may tighten immigration policies, and Congress may increase enforcement resources next year, expecting net immigration to decline to 750,000 per year (the pre-pandemic average was about 1 million per year, reaching about 3 million in 2023).

Moreover, this 750,000 mainly consists of legal immigrants, while the deportation of illegal immigrants will roughly offset those seeking asylum and those illegally entering the United States.

9. Will the White House impose universal tariffs?

No. Goldman Sachs believes that imposing universal tariffs of 10%-20% on all imported goods would pose serious risks, and the White House would prefer to avoid the potential economic costs and political risks associated with universal tariffs.

Hatzius and others estimate that if an additional 10% universal tariff is added to the tariff base in Goldman Sachs' baseline forecast, U.S. inflation will slightly exceed 3% at its peak, the negative impact on GDP growth will increase by 0.75 to 1.25 percentage points, and it could lead to severe sell-offs in the U.S. stock market.

10. Will Congress substantially reduce the primary deficit?

No. Goldman Sachs expects that after Trump is elected president, he will fully continue some of the tax cuts from the 2017 tax reform, restore some expired corporate investment incentives, and implement moderate personal tax cuts, worth about 0.2% of GDP. Goldman Sachs also expects federal government spending to increase, particularly in defense. Therefore, Goldman Sachs predicts that the ratio of the U.S. primary deficit to GDP will remain roughly stable next year.

Hatzius and others also mentioned that the House Republican leadership recently committed to finding ways to cut $2.5 trillion in mandatory spending, and Trump's team indicated that the newly established Department of Government Efficiency could cut at least $2 trillion from the federal budget, but Goldman Sachs believes that these proposals are unlikely to translate into substantial reductions in spending and deficits next year or even in 2026 for two reasons:

1. Republicans in Congress are unlikely to support significant cuts to defense spending, and Trump is also unlikely to support significant cuts to Medicare or Social Security, while cuts to non-defense discretionary spending are also unlikely to yield sufficient savings to significantly alter the trajectory of the primary deficit;
2. These cuts will require Democratic support regardless, as the annual spending bill is separate from the fiscal policy reforms that Republicans plan to pass through a reconciliation process along party lines. Although Congressional Republicans may cut other welfare programs, such as Medicaid, these measures may take effect gradually over several years, and Goldman Sachs expects that the savings will be used to fund new tax cuts rather than reduce the deficit