MOOSPEAK: MAY02.2025
Q1 GDP
According to the Bureau of Economic Analysis, real gross domestic product (GDP) decreased at an annual rate of 0.3% in the first quarter of 2025 (January, February, and March), according to its advance estimate. It was the first quarter of negative growth since Q1 of 2022 and lagged the consensus estimate for a 0.4% gain. In the fourth quarter of 2024, real GDP increased 2.4%.
Falling Q1 real GDP reflected a downturn in net exports and less government spending which was partly offset by upturns consumption and in investment.
The Q1 decline in net exports was the result of a 41% increase in imports (a negative) that outstripped a lesser (2%) increase in direct exports. Imports jumped in response to the likelihood of future US tariffs as businesses stocked up prior to the tariffs taking effect. It was comprised of an increase in both imported goods (mainly medicinal, dental, and pharmaceutical preparations, including vitamins); and in capital goods, (mainly computers, peripherals, and parts).
Improvement in consumer spending in Q1 included both services and goods. Within services, increases were widespread, led by spending on health care as well as housing and utilities. Within goods, an increase in nondurable goods was partly offset by a decrease in durable goods. Uncertainty arising over job losses in the public sector and in the wake of wildfires in California are cited as reasons for slower Q1 consumption.
The decline in government spending reflected a decrease in federal government spending (led by defense consumption expenditures) that was partly offset by an increase in state and local government spending (led by compensation of employees).
The largest contributor to the increase in investment was private inventory investment, led by an increase in wholesale trade (notably, drugs and sundries), i.e. excess imports. Real final sales to private domestic purchasers, the sum of consumer spending and gross private fixed investment, increased 3.0% in the first quarter, compared with an increase of 2.9% in the fourth quarter.
Inflation pressures picked up in Q1, however, as the price index for gross domestic purchases increased 3.4% in the first quarter, hotter than the 2.2% in Q4. Personal consumer inflation per the PCE price index increased 3.6% in Q1, up from an increase of 2.4% in Q4. Excluding food and energy prices, the core PCE price index increased 3.5%, up from 2.6%.
In separate reports this week, month-to-month PCE inflation cooled in March with PCE and core PCE both flat (0.0%) on the month. In addition, year-on-year PCE moderated to +2.3%, while annual core PCE fell to +2.6%-- both closer to the Fed’s 2% target. Nevertheless, a stronger than expected jobs report on Friday offset the cooling PCE data, causing CME futures to push the most likely first Fed rate cut this year from June to July.