Friends, fresh GDP data for the U.S. for the first quarter of 2025 has given analysts and investors cause for serious reflection. A modest growth was expected, but instead... a contraction! According to preliminary estimates, the American economy shrank by 0.3% year-on-year. This is the first decline since early 2022 and a real turnaround after robust growth at the end of 2024. What happened and, most importantly, where will the world's main economic locomotive head next?
The main culprit of the unexpected decline is a sharp increase in imports. Goods and services flooded into the U.S. to such an extent that it became the largest "negative" factor for GDP in decades, except for the pandemic period. Imports increased by more than 40%, and economists see a clear signal behind this: businesses and even ordinary Americans rushed to stock up, fearing new tariff barriers that the Trump administration might impose. Essentially, the fear of future import taxes acted as an incentive for preemptive purchases. This could, by the way, have repercussions in the second quarter – as part of the demand has already been realized.
The second blow came from the government. Government spending has decreased, and it is especially noticeable – in defense. Here, a new structure played a role, something like a Department of Efficiency, which seems to have eagerly taken on optimization. The result is less spending from Washington, although partially compensated by increased spending at the local level, in states and cities.
But not everything is so bleak. Consumer spending – which is the heart of the American economy, accounting for more than two-thirds of total GDP – continued to grow, albeit more slowly than in the previous quarter. People spent more on services – from healthcare to housing, and on some goods as well. In March, there was actually a good increase that pleased analysts. Companies also didn’t sit idle: private investments, especially in inventory and equipment, grew significantly. And here again looms the "tariff ghost" – it seems that businesses were also preparing for potential supply restrictions.
And what about inflation? Here the picture is ambiguous. Prices, in general, continued to creep upward, and the personal consumption index (PCE), which the Federal Reserve closely monitors, also accelerated, especially its core version, which does not account for volatile food and energy prices. This core PCE is the main benchmark for the Fed. And here lies the main headache. If imports have risen due to fears of tariffs, and these tariffs are indeed imposed, prices for many imported goods will inevitably rise, risking to spur inflation again.
This situation puts the Fed at a crossroads. On one hand, a weak economy seems to hint: it's time to consider lowering rates to support activity. Cheap credit is a classic stimulus. On the other hand, inflation, especially core PCE, which confidently remains above the target of 2%, screams: "Don't rush!" Premature easing could simply drive prices even higher and undermine trust in the regulator. If core inflation continues to rise, the Fed may even have to start talking about tightening its rhetoric, despite the GDP slowdown.
Therefore, at the upcoming meeting in May, there is practically no doubt: the rate will remain unchanged, most likely at the level of 5.25-5.50%. The Fed will take a pause. They need more data – to see how prices and the economy will behave in the second quarter. Given the contradictory signals – the population is still spending, but the labor market is already showing signs of slowing down (fresh employment data from ADP also turned out to be weak, adding fuel to the fire of recession fears) – the central bank seems to choose a "wait and see" tactic.
This wait-and-see position may drag on throughout the summer, especially if inflation does not start to convincingly decline. The chances of a rate cut in the second half of the year remain, but only if inflation truly calms down and the economy does not slide into a deep recession. For now, the Fed's main mantra is: patience and vigilance.
Financial markets have already reacted nervously to this news: stocks fell, and government bond yields jumped. This reflects the growing uncertainty: what will happen with trade policy, how inflation will behave, and most importantly – when will the Fed decide to act, and in which direction?
Overall, the first quarter of 2025 served as a serious warning. Ahead are several months when the influence of trade policy, price dynamics, and cautious steps by the Fed will determine the further course of events. Buckle up – turbulence is not excluded.