U.S. Financial Conditions Tighten to Pre-War Levels; Global Growth Forecasts Revised Upward

Overview

This report is a regular update of Goldman Sachs' global economic indicators, focusing primarily on recent changes in U.S. financial conditions and their implications for the growth outlook. The report notes that following better-than-expected employment data released last Friday, the U.S. Financial Conditions Index (FCI) has tightened back to 'pre-war' levels. Despite tighter financial conditions, Goldman Sachs has raised GDP growth forecasts for the global economy and several major economies based on high-frequency data, reflecting that real economic activity has not immediately stalled due to tightening financial conditions. Overall, this presents a complex macroeconomic picture characterized by the coexistence of 'financial tightening' and 'growth resilience.'

Core views

Regarding financial conditions, the U.S. Financial Conditions Index (FCI) has tightened significantly driven by recent strong employment data, returning to its previous 'pre-war' baseline level. In terms of composition, equity market performance and rising long-term interest rates were the primary drivers of this round of financial tightening, while short-term interest rates and credit spreads contributed relatively little. Globally, the FCI excluding Russia also tightened, but to a lesser extent than in the U.S., indicating divergence in financial conditions across regions. On real activity, despite tighter financial conditions, high-frequency data indicates that economic growth remains robust. The Global Current Activity Indicator (CAI) held at +3.0% (annualized month-over-month) in May, with the U.S. CAI further rising to +3.1%, suggesting continued strengthening of economic momentum in the second quarter. Emerging markets performed particularly well, with China's and India's CAIs reaching +5.4% and +7.4%, respectively. In contrast, activity indicators in the Eurozone and the UK were relatively weak, with Germany even showing negative growth signals, highlighting growth disparities among developed economies. Regarding growth forecast adjustments, Goldman Sachs raised its 2026 global GDP growth forecast based on the latest real activity data. Specifically, forecasts for India, the UK, South Korea, Brazil, and Taiwan were significantly revised upward, with Taiwan's forecast increasing by 4.2 percentage points. Meanwhile, forecasts for Canada, France, and Mexico were slightly lowered. This adjustment suggests that despite facing financial headwinds, endogenous growth momentum globally—especially in Asia and select emerging markets—remains stronger than previously anticipated. On inflation and the labor market, trimmed core inflation metrics indicate that inflation rates in the U.S. and Eurozone are gradually falling toward the 2% target, although price pressures in the UK and certain service sectors remain sticky. Wage trackers show that wage growth in G10 countries has slowed markedly from its peak but remains above pre-pandemic levels. The Jobs-Workers Gap has largely closed in the U.S., while slight signs of labor surplus have emerged in the UK and some European countries, which should help alleviate future wage inflation pressures.

Analysis framework

The report employs a proprietary system of high-frequency macroeconomic indicators to monitor global economic conditions in real time, rather than relying solely on lagging official statistics. The analytical framework follows a transmission logic of 'Financial Conditions → Real Activity → Inflation/Employment → Policy/Forecasts.' First, it quantifies the actual transmission effects of monetary policy through the Financial Conditions Index (FCI), aggregating interest rates, exchange rates, equity prices, and credit spreads into a comparable index to assess whether financial conditions are accommodative or restrictive. Second, it utilizes the Current Activity Indicator (CAI) as a real-time proxy for GDP; this indicator extracts principal components from various high-frequency data points such as industrial production, retail sales, and PMI, enabling earlier detection of economic turning points than official GDP releases. Finally, it combines structural indicators—including trimmed core inflation, wage trackers, and the Jobs-Workers Gap—to evaluate the persistence of price pressures and calibrate GDP and inflation forecasts for subsequent quarters accordingly. This 'dashboard-style' analytical approach allows the institution to rapidly revise macroeconomic assessments during gaps between official data releases.

Methodology notes

• Macroeconomic framework

  Financial Conditions Index (FCI)

  The FCI is a composite index weighted from multiple financial variables including interest rates, exchange rates, equity prices, and credit spreads, used to measure the actual tightness or looseness of financial conditions relative to the real economy. In this report, it serves as the core leading indicator for assessing U.S. monetary policy transmission effectiveness and headwinds to economic growth.

• Macroeconomic framework

  Current Activity Indicator (CAI)

  The CAI is derived using principal component analysis to extract the 'first principal component' from multiple high-frequency real economy data series, serving effectively as a real-time high-frequency proxy for official GDP. The report uses it to bridge the lag in official GDP releases, identifying acceleration or deceleration signals in economic activity weeks or even months in advance.

• Macroeconomic framework

  Trimmed Core Inflation

  This method excludes the one-third of components with the most extreme price movements when calculating core inflation to filter out short-term noise and supply shock distortions. The report uses it to more accurately capture underlying inflation trends, avoiding misinterpretations of central bank policy decisions caused by abnormal fluctuations in individual items.

• Macroeconomic framework

  Jobs-Workers Gap

  This metric measures the difference between total labor demand (job openings plus employment) and total labor supply. A positive value indicates labor shortages and upward wage pressure, while a negative value indicates labor surplus. The report uses it instead of traditional unemployment rates to provide a more forward-looking assessment of labor market tightness and wage inflation inflection points.

Key data

• U.S. May Current Activity Indicator (CAI)+3.1%Annualized month-over-month growth rate, up 0.1 percentage points from last week, indicating accelerating economic activity
• Global May Current Activity Indicator (CAI)+3.0%Annualized month-over-month growth rate, maintaining robust expansion, slightly above potential growth rate
• U.S. FCI Weekly Change+22.9bpsSignificant tightening in financial conditions, primarily driven by equities (+13.7bps) and exchange rates (+6.4bps)
• 2026 Global GDP Forecast AdjustmentUpward RevisionGlobal forecast raised by approximately 1.0 percentage point over the past 60 days, led by India, UK, and South Korea
• Japan May CAI Change-0.8ppPreliminary data indicates a slowdown in Japanese economic activity

Impact & implications

The report suggests that the return of U.S. financial conditions to pre-war levels implies that previous financial easing dividends have largely dissipated, and future economic growth will rely more heavily on endogenous fundamentals. However, the sustained strength in both global and U.S. CAIs indicates that current financial tightening has not yet materially dragged down the real economy, keeping the probability of a soft landing relatively high. Regionally, this divergence necessitates more targeted investment strategies: Asian emerging markets, supported by strong activity indicators and upwardly revised growth expectations, remain the primary engine of global growth, whereas the Eurozone and the UK face dual challenges of sluggish growth and sticky inflation, leaving them with relatively constrained policy space.

What to watch

• Whether subsequent U.S. employment data continues to exceed expectations, potentially driving further tightening of financial conditions
• Whether the Global Current Activity Indicator (CAI) can sustain its current growth rate amid tightening financial conditions
• Whether divergences between national wage trackers and core inflation converge, confirming the disinflation trend