GDP sees first-quarter slide as central bank weighs up whether to slash rates
US real gross domestic product (GDP) suffered its worst quarter in Q1 2025 since early 2022 as businesses raced to import products with the Trump administration’s “Liberation Day” tariffs looming.
Real GDP decreased by 0.3% in the first quarter, the first quarterly decline since 2022, when the economy contracted by 1.0% in Q1.
With April wrapping up, all eyes turn to the Federal Reserve, which will meet next week to discuss the course ahead for interest rates. While rate cuts were predicted pre-tariffs, many experts believe the Fed will take a wait-and-see approach.
Brokers are concerned about the current market conditions, as high inflation combined with potential job losses could lead to stagflation.
Mike Fratantoni, senior vice president and chief economist of the Mortgage Bankers Association, believes the Fed must balance economic headwinds against inflationary pressure.
“The quandary facing the Federal Reserve is that while the trend in the data is clearly showing a slowing economy, it also renewed upward pressure on inflation,” Fratantoni said. “We expect that the Fed will hold rates steady at its meeting next week and will indicate that it will continue to hold at this level until it becomes clear whether a recession or inflation is the bigger risk.”
Imports weigh down GDP
Imports, which are subtracted in the GDP calculation, were a major factor in the decline, while government spending also weighed against the economy.
“Economic growth went negative in the first quarter as businesses rushed to import goods before tariffs went into effect,” Fratantoni said. “In addition to the pullback in activity, the inflation metrics increased relative to the prior quarter, so both growth and inflation were headed in the wrong direction.”
Fratantoni believes companies were willing to bring excess goods into the country to try to reduce future production costs after the tariffs took effect.
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— Mortgage Professional America Magazine (@MPAMagazineUS) April 29, 2025
“The biggest drag on growth was a more than 50% increase in imported goods, which subtracts from growth in the GDP calculation,” Fratantoni said. “The surge in imports subtracted more than five percentage points from growth. More than two percentage points of this was offset by a big jump in nonfarm inventories. Clearly, businesses were rushing to get goods into the country and were willing to store them until they were needed for production.”
Increases in investment, consumer spending, and exports partially offset the decreases. However, Fratantoni notes that consumer spending was not as strong in the first quarter.
“The data showed a slower 1.8% growth rate for consumer spending, with a reduction in spending on motor vehicles and parts compared to last quarter,” Fratantoni said. “Households were getting more cautious with respect to larger purchases even in advance of the tariff announcements.”
The GDP numbers align with the April 2025 economic and housing outlook from Fannie Mae’s Economic and Strategic Research (ESR) group. The group had previously forecasted a growth in GDP of 1.7% in 2025 and 2.1% in 2026. Revised estimates released this week lowered both of those figures to 0.5% in 2025 and 1.9% in 2026.
Job opening reports provide more bad news
The fall in GDP was announced on Wednesday, one day after the Labor Department announced that job openings had fallen to their lowest level since September.
There were 7.2 million job openings in March, dropping from 7.5 million in February and 8.1 million in March 2024.
While the number of openings declined, the hiring rate remained steady at 3.7%. There were increases in the finance sector, as finance and insurance hires increased by 0.3% from February, and real estate and rental and leasing increased by 0.2%.
ADP released its national employment report today. It showed 62,000 jobs created in April, down from 147,000 in March. The Wall Street Journal polled economists, who believed 120,000 jobs would be created in April.
In addition, ADP noted that pay gains for people staying in current jobs rose 4.5% year-over-year, but declined from March.
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