The US economy is already slipping in 2025, and the numbers don’t look good for President Donald Trump, who took the Oval back on January 20.
According to the Federal Reserve Bank of Atlanta, GDP is on track to contract by 1.5% in the first quarter, a drop from the 2.3% growth estimate made just five weeks ago.
The GDPNow tracker, which updates in real-time based on incoming data, used to point to 3.9% growth, but new numbers from the Commerce Department sent it plunging.
An economic report released on Friday morning showed that personal spending fell 0.2% in January, missing the Dow Jones estimate of a 0.1% increase. After adjusting for inflation, it was even worse—a 0.5% drop, enough to wipe an entire percentage point off GDP expectations.
The US economy relies heavily on consumer spending, as it makes up for more than two-thirds of GDP. A 0.2% decline might seem small, but it’s the largest monthly drop in four years. The hit came from weaker-than-expected retail sales, as Americans pulled back on spending due to high inflation, policy uncertainty, and market volatility.
“This is sobering notwithstanding the inherent volatility of the very high frequency ‘nowcast’ maintained by the Atlanta Fed,” Mohamed El-Erian, chief economic advisor at Allianz and president of Queens’ College Cambridge, said in a post on social media site X.
At the same time, exports took a major hit, dragging down GDP even further. The Commerce Department reported that net exports’ contribution to GDP collapsed from -0.41 percentage points to -3.7. The reason? A record $153.3 billion trade deficit in January. Economists say this could be the result of businesses stockpiling imports ahead of Trump’s potential tariffs, making the trade gap even worse.
Markets react as bond yields invert and stocks swing
Wall Street isn’t ignoring the warning signs. The bond market is flashing its most reliable recession indicator: an inverted yield curve. The 3-month Treasury yield has climbed above the 10-year note, a pattern that has historically signaled an economic downturn within 12 to 18 months.
The Dow Jones Industrial Average has been on a rollercoaster. The index is still up 2% for the year, but it’s been wildly volatile, reacting to every new piece of economic data. The S&P 500, which surged by 6% between Election Day and February 19, has tumbled by 3.1% as of press time, according to data from Google Finance.
Meanwhile, the Federal Reserve is coming under pressure as traders in the fed funds futures market are now pricing in an 80% chance of a rate cut in June, with expectations of three total cuts by the end of 2025.
If Fed Chair Jerome Powell moves too fast with rate cuts, inflation could flare up again. If he waits too long, the slowdown could spiral into a full-blown recession.
Economists at Piper Sandler had previously expected 2% growth, but now they’re predicting a 2% contraction. Some economists aren’t convinced the slowdown will last. As recently as early January, a Wall Street Journal survey of economists projected 2.2% GDP growth in the first quarter. Many of those forecasts haven’t changed despite the Atlanta Fed’s gloomy outlook.
Trump’s policies add uncertainty to the economic outlook
The economic slowdown isn’t happening in a vacuum. Trump’s return to the White House has shaken up policy expectations, and businesses aren’t sure what’s coming next. His tariff threats have already pushed inflation expectations higher, something that could complicate the Fed’s response.
“With inflation just recently at a 40-year high, now is not the time to let down our guard,” said Jeff Schmid, president of the Kansas City Fed. The central bank has spent the last two years fighting inflation, and if expectations start rising again, it could force Powell to hold off on rate cuts even as the economy weakens.
The uncertainty is showing up in business sentiment data. The Conference Board found that CEO confidence hit a three-year high in early February. But not everyone is so optimistic—S&P Global’s February survey of purchasing managers showed a sharp drop in optimism for the coming year.
Meanwhile, the labor market is showing early signs of trouble. Initial unemployment claims just hit their highest level since early October. The unemployment rate, which dropped to 4% in January, is still historically low, but layoffs are starting to tick up.
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