The US economy looks set to disappoint this quarter. A number of economists have lowered their forecast for growth in real gross domestic product due to a widening trade deficit and sluggish consumer spending. An uncertain trade war and tepid labor demand have also clouded the outlook for the rest of 2025. Conflating the two would be a mistake, though.
Much of the first quarter’s weakness is a one-off, and the economy should do substantially better in the subsequent three months. That won’t mean we’re out of the woods. It’s in the second half that recessionary risks will really come to the fore as the White House’s trade policies play out, and the Federal Reserve keeps up its guard against inflation. Expect plenty of market volatility along the way.
Winter economic activity is often unpredictable because of the weather and flu season, and the first two months of the year were outliers on both fronts. Southern California battled wildfires. Two winter storm systems froze parts of Texas and the southeast in January, with historic snowfall in New Orleans and multiple days of school closures here in metro Atlanta (as a parent, we lost one weekend to snow and then almost the whole week of the Martin Luther King Jr. holiday to ice that refused to melt). Then, a blast of cold air broke temperature records across the Plains and the South in the latter part of February. We have also had the worst flu season in 15 years, keeping people at home when they would typically be out shopping, dining or traveling.
The Trump administration’s spending cuts hurt, too. Domestic airlines all lowered their first-quarter earnings guidance last month. United Airlines Holdings Inc. called out weakness in government travel stemming from the actions of Elon Musk’s Department of Government Efficiency and the uncertainty around a possible government shutdown.
Retail sales disappointed in both January and February. The softness may extend into March if the abrupt 10% drop in the S&P 500 Index in recent weeks crimps high-end spending, an important driver of economic growth last year. (Read this.) The US also had a record trade shortfall in January as companies scrambled to secure foreign goods ahead of any tariffs.
All up, the economy probably expanded at a 1.4% annualized pace this quarter, according to the Bloomberg Weighted Average of forecasts, slowing from 2.3% in the final three months of 2024. Bloomberg Economics has the most bearish projection at 0.4%.
In thinking about where the economy goes from here, the labor market is key. The “low hiring, low firing” equilibrium we’ve had since mid-2023 is hard for some workers but nowhere near a collapse. The number of people filing initial jobless claims remains low. Those continuing to receive unemployment benefits have increased 5.4%, year over year, as of March 8, a sign of modest deterioration but not a calamity.
That suggests consumption — almost 70% of GDP — is likely to bounce back in the second quarter. People chose not to spend at the start of the year because of the weather, or illness, or worries about the stock market or the Trump administration’s actions. Yet, in the vast majority of cases, they were still employed and being paid and should now have money sitting in their bank accounts. The personal savings rate in January jumped to its highest since last June and may have risen again in February. When it comes to Americans, the strong assumption should be that when workers are drawing a salary, they’re going to spend it.
Should this scenario unfold, it will mechanically look like a pickup in economic growth in the second quarter. But it would make more sense to compare that rebound to the huge month-to-month swings we sometimes get in job growth after natural disasters such as hurricanes. For instance, the economy added just 44,000 jobs last October due to the impact of Hurricane Helene, but 261,000 jobs in November as states, including North Carolina and Florida, got back on their feet. The right way to read such data is to average the two months.
Similarly, I’d average GDP growth in the first and second quarters rather than overreact to either figure. The Federal Reserve Bank of Atlanta’s GDPNow model currently shows consumption adding just 0.3 percentage points to first-quarter growth, the weakest contribution since the second quarter of 2020. Over the past two years, consumption has, on average, added 2 percentage points to quarterly GDP growth. A larger contribution in the April-June period that pushes annualized GDP growth into the 3% range can’t be ruled out using my natural-disaster framework.
It’s important to note that this would be entirely consistent with an economy and labor market that continues to weaken. There’s still no evidence of a pickup in hiring, and there’s no reason to think interest rate-sensitive industries will recover in the near-term with the Fed waiting for more information before easing monetary policy. Downside risks to the economy remain, but the data we’ve gotten in the first quarter overstates the weakness, which remains gradual but steady.
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