Former Goldman Sachs Co-chair Sends Strong Message On Economy

Economists and market watchers are sounding the alarm on recession risk. The reason? Sticky inflation and tumbling consumer confidence.

In January, inflation was 3% up from one year ago, an acceleration from 2.4% in September. Meanwhile, the Conference Board's Consumer Confidence Survey showed the steepest decline since 2021.

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Investors aren't ignoring the recession chatter. 

At the S&P 500's low on Tuesday the benchmark was down more than 6% from its mid-month peak. The returns for technology stocks, which were responsible for about half the S&P 500's 24% gain in 2024, have been far worse.

AI-stock darling Nvidia is down 18% and recent high-flyer Palantir has tumbled more than 30% from its mid-month highs. 

Related: Goldman Sachs CEO has 2-word response to recession talk

Given the mounting economic concerns and recent stock market slide, investors are right to wonder whether a recession could derail the multiyear stock market rally.

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A lot appears to be going the wrong way

A friendly Federal Reserve largely supported investors' optimism last year. After embracing the most hawkish monetary policy to rein in inflation, the Fed pivoted in September, cutting rates three times before year's end to steady a wobbling job market.

Most expected the Fed to remain on investors' side in 2025, but recent inflation reexertion forced Chairman Jerome Powell to press pause on further interest rate cuts. As a result, the tailwinds for business spending and profitability associated with cheaper money have abated.

Related: ADP jobs data adds to economic uncertainty gripping markets

Worse, the pause may not have fixed the jobs problem. More Americans — 244,000 of them — filed for unemployment benefits last week. That was the most since last fall and far north of the 203,000 claims filed in early January.

Meanwhile, the unemployment rate has nosed its way higher, to 4% from 3.5% as recently as 2023. 

On Wednesday markets got more bad jobs news when ADP reported its latest update. The payroll giant reported that 77,000 private sector jobs were created last month, the worst showing since last summer.

And that's not all. Additional weak data on spending and manufacturing activity has resulted in a steep drop in the Atlanta Fed's GDP tracking tool, GDPNow. Last week, a reset on personal consumption spending and inflation-adjusted private fixed income data caused the measure to drop to -2.8% on March 3. 

Of course, this measure will shift as more data come in, and it could certainly recover over the coming weeks. Still, given that most define a recession as two consecutive negative GDP quarters, the data are turning heads. 

The situation may worsen, says former Goldman Sachs Co-Chair Rubin

A weakening economy in search of support isn't going to find it in the form of tariffs, argues Robert Rubin, Goldman Sachs's former co-chairman and former U.S. treasury secretary.

This week, 25% tariffs went into effect for imports from Canada and Mexico. China tariffs were doubled to 20%. 

Related: Popular retailers may get smacked hard by tariffs

That's problematic for many companies, given that supply chains are tied tightly to those markets. 

Home Depot and Lowe's may struggle because of increasing costs for Canadian lumber, while grocers may be hit by rising produce costs out of Mexico. 

Many automakers, including General Motors, import cars from plants in Mexico and Canada. China is a major source of everything from toys to electronics. The hardest hit could be retailers like Kohl's, which are already struggling to pass along costs to cash-strapped shoppers.

"I think tariffs create a very serious risk of inflation," said Rubin. "I also think it will be a substantial threat to growth because it can adversely affect productivity."

The prospect of retaliatory tariffs from nations risks a trade war, further pressuring prices. And that doesn't even address the fact that these tariffs go against our existing treaties with Canada and Mexico, says Rubin, risking future dealmaking. 

More Economic Analysis:

• U.S. consumers are wilting under renewed stagflation risks
• Jobs reports provide critical look at economy, could roil markets
• Fed inflation gauge indicates big changes in key economic driver

As a result, Rubin said, a trade war would be significantly "against our self-interest."

Drilling deeper into the economy, he said the debt is a big and growing problem and extending expiring tax cuts "will substantially increase our deficits."

"We are at historic highs in terms of of debt to GDP ratio." 

The outcome from that happening? Rubin says it will mean higher interest rates and lower business confidence. Neither is a good recipe for avoiding recession.

Related: Veteran fund manager unveils eye-popping S&P 500 forecast