GDP falls for first time in nearly three years, hinting at recession
Nick Rummell
MANHATTAN (CN) — The U.S. economy contracted by 0.3% during the first quarter of this year, according to federal estimates, though the data doesn’t yet fully take into account the effects of tariffs.
According to the U.S. Bureau of Economic Analysis, gross domestic product contracted by 0.3% during the first quarter of 2025, well below the consensus estimate of a 0.4% increase but not the disaster some economists had predicted in recent days. This is the first of three estimates for first quarter GDP, which won't be known for a couple months.
The agency noted an increase in imports, as well as a 5.1% decrease in federal government spending, were responsible. The overall decrease was offset by a slight increase in outlays by state and local government.
Paul Ashworth, chief North America economist at Capital Economics, wrote in an investor’s note that the GDP estimate was “not as bad as feared, although some of the drop back in imports in the second quarter will now be partly offset by a slowing in inventory accumulation.”
Peter Boockvar, chief investment officer at Bleakley Advisory Group, said in an investor’s note that he believes it best to merge the Q1 and Q2 GDP reports to “get a more organic view of economic activity” but that he expects a “stagflationary combination of higher prices … and punk growth.”
The estimate also does not fully take into account the impact of wildfires in Southern California, which upended consumer and business activities. However, the agency predicts the fires resulted in $34 billion in private asset losses and $11 billion in government assets.
Prior to Wednesday’s release, GDP increase had remained fairly steady for the past few quarters around 3%, though it slipped to 2.4% in the last quarter of 2024. GDP had contracted just once since the Covid lockdowns of 2020, during the first two quarters of 2022.
In advance of the GDP estimate, many economists said the number would not materially affect their calculations of how the economy will progress later this year.
According to Michael Pearce, deputy chief U.S. economist at Oxford Economics, imports surged during the first quarter but were offset by a boost to company inventories, ”which will generate an enormous drag on first-quarter GDP growth.”
Pearce said that employment data “will be a better guide to underlying growth in the economy because they are relatively unaffected by swings in trade that are driven by the timing of tariff announcements.”
Though the labor market is still relatively strong, consumers are increasingly worried.
The latest consumer confidence index by The Conference Board fell for the fifth straight time to hit 86 points in April, the lowest reading since 2020. Worse, the “expectations index” plummeted 12.5 points to hit 54.4 points, the lowest it has been since October 2011.
Consumers are concerned about the labor market, too. The board noted that 32.1% of consumers expect fewer jobs in the next six months, which is nearly as bad as in April 2009 when the Great Recession was raging.
Recessions are commonly defined as a contraction in the economy for two straight quarters.
“The three expectation components — business conditions, employment prospects, and future income — all deteriorated sharply, reflecting pervasive pessimism about the future,” Stephanie Guichard, senior economist at the board, said in a statement.