Economic Overview – Update
Preliminary data on U.S. GDP growth for the first quarter of 2025 indicates a downturn, as reported by the Federal Reserve Bank of Atlanta.
According to the latest update, U.S. GDP growth is projected at 1.5% for the January to March period, reflecting a significant change from earlier expectations.
Recent indicators suggest consumer spending fell short of expectations, primarily due to adverse weather conditions in January. Additionally, export activities were weak, leading to diminished growth prospects.
Prior to the consumer spending report released today, GDP growth was anticipated to be at 2.3% for the quarter.
While the GDP estimation model is known to be volatile and can fluctuate significantly, it aligns with other recent measures that indicate a slowdown in economic growth.
Mohamed El-Erian, Chief Economic Advisor at Allianz and Head of Queens College at Cambridge, expressed frustration over the fluctuations in GDP forecasts via a recent social media commentary.
The GDP forecasting model previously suggested growth as high as 3.9% in early February; however, this figure has seen a downward adjustment with the release of additional data.
The Department of Commerce also reported a 0.2% decline in personal spending for January, falling short of Dow Jones estimates that anticipated a 0.1% increase. After accounting for inflation adjustments, real spending decreased by 0.5%, which consequently lowered the expected contribution to GDP by one full percentage point, revising it to 1.3% based on GDPNOW calculations.
Meanwhile, the net contribution from exports deteriorated significantly, decreasing from -0.41 percentage points to -3.7 percentage points.
This data arrives amid growing concerns regarding consumer confidence and inflationary pressures, as surveys indicate a decline in consumer sentiment. Furthermore, a preferred measure of inflation published by the Federal Reserve showed a decrease, with the Core Personal Consumption Expenditures Index (PCE) dropping to 2.6%, down 0.3 percentage points from December.
Adding to the economic challenges, the labor market has displayed concerning signs, with initial unemployment claims reaching levels not seen since early October.
The bond market has begun to reflect expectations of slower economic growth, with the yield on three-month Treasuries surpassing that of ten-year bonds. This trend has historically indicated an impending recession within a 12 to 18-month timeframe.
Moreover, economic and political uncertainties have contributed to a rocky start for the stock market in 2025, with the Dow Jones Industrial Average experiencing a 2% increase amidst significant volatility.
Joseph Brusuelas, Chief Economist at RSM, noted that the recent optimism in the equity markets may be disrupted soon.
Market participants increasingly speculate that the Federal Reserve will pivot towards reducing interest rates in response to economic slowdowns. As of Friday afternoon, futures market traders have heightened expectations for a quarter-point cut in rates by June to about 80%, anticipating three such reductions throughout the year.
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