2025 First Quarter Economic Brief
After a rough stretch between the middle of February through the middle of April, the market found it's footing. If you are a boxing fan, the tariffs were like a left hook out of nowhere, resulting in a temporary knockdown. But despite the fact that the world's consumers and businesses have not yet experienced the economic impact of the tariffs, market participants seem to be expecting the impact to be less than initially feared. After a wild ride, here is what we know about the economy in the first quarter of 2025.
U.S. Economy Hits a Speed Bump in Q1 2025
The U.S. economy started 2025 on a slower note, with real gross domestic product (GDP) declining at an annualized rate of 0.3% in the first quarter. This marks the first quarterly contraction in three years and a notable reversal from the solid 2.4% growth seen at the end of 2024. 2 3 8
Why Did Growth Stall?
The primary culprit was a massive surge in imports, which soared by over 40% as businesses rushed to stockpile goods ahead of new tariffs announced by the Trump administration. Imports subtract from GDP calculations, so this front-loading of foreign purchases dragged down overall growth by more than five percentage points. 6 7 8 While exports did rise modestly, it wasn’t enough to offset the import spike.
Government spending also declined, dropping 1.4% overall and 5.1% at the federal level-the first such decrease since 2022. Both defense and non-defense outlays were cut, reflecting new cost-cutting policies and efficiency drives. 1 5
Consumer and Business Activity: A Mixed Picture
Consumer spending, which typically drives the U.S. economy, grew at a slower 1.8% pace. Durable goods purchases fell by 3.4%, likely due to higher interest rates and market volatility, while spending on services and nondurable goods also moderated1. Despite these headwinds, underlying demand remained resilient: real final sales to private domestic purchasers-a measure that strips out the impact of trade and inventories-rose by a healthy 3%. 2 5 8
Business investment was uneven. Equipment investment rebounded sharply, especially in information technology, but manufacturing and housing continued to struggle under the weight of higher borrowing costs. 1
Labor Market and Inflation
The quarter ended with a 4.2% unemployment rate, and inflation remained relatively contained at 2.4% in March. However, core inflation (excluding food and energy) ran hotter, with the personal consumption expenditures (PCE) price index up 3.5% for the quarter. 1 2 8 Real disposable income grew 1.7% year-over-year, offering some support to household finances1.
Looking Ahead
Economists caution that the Q1 GDP decline may not signal a recession. The contraction was largely driven by temporary factors-namely, the import surge ahead of tariffs. As this effect fades, some expect a rebound in subsequent quarters, though ongoing trade tensions and higher prices could weigh on growth for the rest of the year. 5 6 8
The U.S. economy remains above its long-term trend, but the positive output gap is narrowing, suggesting a gradual return to more sustainable growth rates. 1 The key question for the rest of 2025 will be whether consumer and business confidence can withstand the dual pressures of tariffs and persistent inflation.
Bottom Line: Q1 2025 was a reset for the U.S. economy, shaped by policy changes and shifting business strategies. While the headline numbers look weak, underlying demand is holding up-for now. The next few quarters will be pivotal in determining whether this slowdown is a temporary blip or the start of a more challenging period for growth.
SOURCES:
1 - https://www.textileworld.com/textile-world/2025/05/plastics-u-s-economic-growth-slowed-in-first-quarter-output-gap-remains-positive/
2 - https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-advance-estimate
3 - https://www.bea.gov/data/gdp/gross-domestic-product
4 - (I don't think there was a fourth source used, I can't see one anywhere)
5 - https://www.cbsnews.com/news/gdp-report-today-trump-tariffs-economy-first-quarter-2025/
6 - https://www.cnbc.com/2025/04/30/gdp-q1-2025-.html
7 - https://www.wsj.com/economy/us-gdp-q1-2025-1f82f689
8 - https://finance.yahoo.com/news/us-economy-contracts-at-03-rate-in-q1-first-gdp-pullback-in-3-years-123544859.html