Goldman Sachs is sounding a new alarm: the U.S. economy is slipping, and the war in Iran is making it worse. The bank raised its 12-month recession probability to 25% Thursdayโup 5 percentage pointsโ after a brutal February jobs report and surging oil prices forced economists to tear up their forecasts.โ
Itโs a striking signal from Wall Streetโs most closely watched research desk, and it comes at a moment when the Trump administrationโs twin betsโon tariffs and military engagement in the Middle Eastโare colliding with a labor market that was already showing cracks.
The jobs number that rattled Wall Street
February payrolls fell by 92,000 โ a number that Goldman economist David Mericle called a โreminder that job growth is still too low.โ The bankโs estimate of underlying job creation sits barely above zero, trailing even the 70,000 jobs-per-month breakeven rate needed just to keep pace with new labor market entrants. Job openings, meanwhile, are still falling.โ
The unemployment rate ticked up to 4.44% last month, and Goldman now expects it to reach 4.6% by the third quarter. An unusual revision to the labor force participation rateโdown 0.4 percentage points, reflecting updated Census data showing more retired Americans than previously countedโdeepened the picture of a softening workforce.โ
Oil is the new wild card
The war in Iran has thrown a volatile new input into an already complicated economic equation. Goldmanโs baseline forecast has Brent crude averaging $98 per barrel in March and April before retreating to $71 by year-end. In a worst-case scenarioโa one-month disruption to the Strait of HormuzโBrent could spike to $110, sending headline inflation to a spring peak near 4.5%.โ
Even in the baseline, Goldman raised its headline PCE inflation forecast by 0.8 percentage points to 2.9% by December.โ
Tariffs are already in the numbers
Goldman estimates that Trumpโs tariffs have already added more than 70 basis points to core inflation. Net of those tariff effects, underlying inflation looks far more containedโcore CPI near 1.75% and core PCE near 2.25%โsuggesting the policy itself is doing meaningful inflationary work.โ
The Fed is stuck
Rate cuts arenโt coming anytime soon. Goldman pushed its two expected 2026 cuts back to September and December, with the bank noting that โa higher inflation path will make it harder for the Fed to cut soon.โ The Fed faces a classic stagflationary squeeze: a labor market soft enough to argue for easing, but an inflation pathโdriven by oil and tariffsโthat argues for restraint.โ
Not everyone is hitting the panic button
To be sure, 25% recession odds still mean Goldmanโs base case is continued growth โ and the bankโs own data offers reasons for cautious optimism. Productivity growth has averaged a solid 2.2% annualized this cycle, which Mericle sees as a reversion to the U.S. historical average after years of post-financial-crisis underperformance. Shelter inflation is also cooling sharply, with new lease rent growth running near zero year-over-year, which Goldman expects to drag overall shelter costs down from 3.1% to 2.3% by December. And Goldman itself notes that if the labor market weakens further, the Fed would likely cut earlierโproviding a built-in policy cushion that didnโt exist in prior downturns.โ
A strong Q1 wonโt last
Goldman is tracking first-quarter GDP growth at 3.3%, but 1.3 percentage points of that reflects the one-time boost from last fallโs government shutdown ending. From Q2 through Q4, the bank sees growth decelerating to roughly 2.0%, 1.9%, and 1.9% respectivelyโa glide path toward stall speed.
Written by Nick Lichtenberg for Fortune as โGoldman just raised recession odds to 25%. Hereโs what Trumpโs war economy is doing to jobsโ and republished with permission.
