Podcast Summary: "How Tariffs Will Impact the US Economy"

Podcast: Exchanges (Goldman Sachs)
Host: Alison Nathan
Guest: David Merrickle, Chief US Economist, Goldman Sachs Research
Date: March 11, 2025

Overview

In this episode, host Alison Nathan speaks with David Merrickle, Goldman Sachs’ chief US economist, to unpack the recent surge in US tariffs, their evolving magnitude, and the likely ramifications for inflation, economic growth, recession risk, Fed policy, and business confidence. The discussion draws distinctions between current policy uncertainty and prior tariff rounds, weighs the risk of stagflation, and details what indicators economists are watching in the months ahead.

Key Discussion Points & Insights

1. Current State and Expectations for Tariffs

• The US effective tariff rate increased by about 3 percentage points between Election Day and Inauguration Day—within prior expectations.
• However, Goldman Sachs now expects a more substantial overall increase: from a 4–5 percentage-point forecast previously to an anticipated 10 percentage-point increase due to "willingness to go ahead initially with these tariffs on Canada and Mexico," plus possible new tariffs on critical imports and autos, and “a meaningful reciprocal tariff.”
  • Notable Quote:
    “We had been expecting a 4 to 5 percentage point increase in the effective tariff rate. Now we're expecting that it will all add up to about a 10 percentage point increase.” (David Merrickle, [01:24])

2. Inflation Implications

• Without tariffs, inflation was expected to fall to just above 2% (Fed’s preferred core PCE measure).
• Under higher tariffs, inflation is now forecast just below 3%—a one-time price level impact, but with heightened inflation expectations among the public and businesses.
• Comparison with 2019: Public attention to tariffs is greater now, fueling short-term inflation expectations.
  • Notable Quote:
    "It's a little bit of a surprise relative to...several months back, just how focused businesses and consumers are on tariffs.” (David Merrickle, [02:44])

3. Economic Growth and Stagflation Risk

• Tariffs are acting as a tax on disposable income and pressure consumer spending.
• Goldman Sachs trimmed its 2025 GDP growth forecast from 2.2% to 1.7%, reflecting reduced consumer and business spending, mild equity selloffs, tighter financial conditions, and greater business uncertainty.
• While both inflation and growth are moving in the wrong direction (higher inflation, lower growth), the scale does not warrant a stagflation comparison akin to the 1970s.
  • Notable Quote:
    “I think using that word [stagflation]...seems to me inappropriate." (David Merrickle, [03:41])

4. Recession Probabilities and Policy Flexibility

• 12-month recession risk nudged up from 15% to 20%.
• Increased risk hinges on policy choices by the administration; recession risk could rise if tariffs are larger than expected or if the White House sticks with tariffs amid weakening data.
  • Recent comments from President Trump suggested he’s less focused on recession risk than in his first term.
  • Notable Quote:
    "I think one gets the impression that the White House is willing to pursue policies that might imply more economic and political risk than it was willing to in its first term." (David Merrickle, [06:20])

5. White House Signals and Market Perceptions

• Both President Trump and his administration have signaled a willingness to endure near-term economic disruption for policy goals, setting market participants on edge and prompting reevaluation of potential risks.

6. Federal Reserve Policy Outlook

• Markets currently price in three Fed rate cuts for 2025, while Goldman Sachs maintains a forecast of two cuts this year and one next year.
• The rationale for cuts has shifted: normalization cuts (if inflation drifts lower and tariffs are moderate) versus “insurance cuts” reminiscent of 2019 (if tariffs cause material economic damage).
• With inflation expectations rising, the bar for insurance cuts is higher than in 2019; evidence of genuine economic deterioration (in business/consumer confidence, data, market performance) would be required.
  • Notable Quote:
    “It is going to be an awkward question for any central banker to answer, why are you cutting rates when inflation expectations are moving higher?” (David Merrickle, [09:49])

7. Effects of Uncertainty on the Economy

• This episode’s policy uncertainty is deemed riskier for investment and hiring than in 2019.
• Unlike past trade disputes, the proposed tariffs now target a broader set of countries and sectors, increasing the risk of foreign retaliation and spillover into US business planning across manufacturing and services.
  • Notable Quote:
    "I do think the uncertainty is more serious for investment and hiring decisions for two reasons...The tariffs...are much larger...and now...far more US businesses would be affected on the input side, on the output side, or by potential foreign retaliation." (David Merrickle, [13:11])

8. What to Watch Going Forward

• Upcoming business confidence surveys and capital spending expectations will be key early indicators of tariff impacts.
• Hard data on hiring and business investment will provide confirmation, with particular attention on healthcare and government sectors (potentially vulnerable to proposed spending cuts), and already-weak business investment figures.
  • Notable Quote:
    “I'm not sure in an absolute sense we're in a bad place just yet. But...you could start seeing some of these uncertainty effects materialize in coming months, either on the hiring side or the capital spending side.” (David Merrickle, [17:20])

Timestamps of Important Segments

• 00:30–01:39 — Status and scale of tariffs; updated expectations
• 01:46–03:18 — Inflation forecasts and implications of tariffs
• 03:31–04:47 — Stagflation risk and GDP growth outlook
• 05:10–06:53 — Recession risk and administration's risk appetite
• 07:47–10:59 — Fed rate cut scenarios: normalization vs. insurance cuts, higher bar for action
• 12:41–14:44 — Economic damage from uncertainty; expansion of tariff and retaliation scope
• 14:53–17:54 — Key forward-looking data (confidence, hiring, investment) and sectoral exposure

Memorable Quotes

• On Escalating Tariffs:
  “Now we're expecting that it will all add up to about a 10 percentage point increase in the effective tariff rate.” (David Merrickle, [01:24])

• On Consumer/Business Sensitivity:
  “Just how focused businesses and consumers are on tariffs...is a little bit of a surprise relative to what I might have expected several months back.” (David Merrickle, [02:44])

• On Stagflation Comparisons:
  “Comparing what we're expecting even larger tariffs to do to that [1970s] period seems to me inappropriate.” (David Merrickle, [03:41])

• On Administration's Risk Appetite:
  “The White House is willing to pursue policies that might imply more economic and political risk than it was willing to in its first term.” (David Merrickle, [06:20])

• On Fed Options:
  “It is going to be an awkward question for any central banker to answer, why are you cutting rates when inflation expectations are moving higher?” (David Merrickle, [09:49])

• On Uncertainty for Investment:
  “I do think the uncertainty is more serious for investment and hiring decisions for two reasons...the tariffs...are much larger...and now...far more US businesses would be affected on the input side, on the output side, or by potential foreign retaliation.” (David Merrickle, [13:11])

Conclusion

David Merrickle outlines that the new, larger-than-anticipated round of US tariffs will likely keep inflation higher, weaken growth, and increase economic uncertainty, especially for businesses weighing investment and hiring. The White House appears willing to tolerate more economic risk than in past cycles, with a more dispersed and uncertain policy environment. While recession risk is elevated slightly, the biggest immediate challenge is the foggy environment for businesses and policymakers, particularly the Fed, as they gauge whether the economic fallout will require preemptive rate cuts.

This summary covers the core discussions and expert insights, omitting program intros, conclusions, and compliance disclaimers. Perfect for anyone needing a concise but complete briefing on this episode.