US Economy Contracts 0.3% in Q1 2025

The US economy contracted in the first quarter of 2025, with real gross domestic product (GDP) declining at an annual rate of 0.3%, according to the advance estimate released by the Bureau of Economic Analysis.

This marks a significant reversal from the 2.4% growth recorded in the fourth quarter of 2024, and the first quarterly contraction since early 2022.

Imports and Government Spending Cause GDP Decline

The decline in GDP was mainly influenced by a sharp rise in imports and a reduction in government spending. These factors outweighed gains in other areas, though some components helped to limit the downturn:

Imports increased notably, putting downward pressure on GDP,
Government outlays declined, contributing to the contraction,
Private investment, consumer spending, and exports all rose and partially offset the losses.

Compared to Q4 2024, the economic weakness in Q1 stemmed mainly from higher import volumes, a slowdown in consumer spending growth, and reduced public sector expenditures. However, stronger private investment and export activity offered some resilience.

Domestic Demand Remains Solid

Despite the headline contraction, domestic demand remained firm. Real final sales to private domestic purchasers, which combine consumer spending and private fixed investment, increased by 3.0% in Q1 2025. This was slightly above the 2.9% growth seen in the previous quarter, indicating underlying strength in the private sector.

Inflation Accelerates in Early 2025

Price pressures continued to rise during the first quarter. The price index for gross domestic purchases rose by 3.4%, compared to a 2.2% increase in Q4 2024.

The PCE price index climbed by 3.6%, up from 2.4% in the previous quarter.
Core PCE, which excludes food and energy, increased by 3.5%, compared to 2.6% previously.

While the economy cooled on the surface, underlying inflationary trends intensified, posing potential challenges for monetary policy in the months ahead.

Source: US Bureau of Economic Analysis

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