Early economic data for the first quarter of 2025 is signaling potential negative growth, according to the Federal Reserve Bank of Atlanta’s GDPNow tracker. The measure, which monitors incoming economic indicators, currently projects that gross domestic product (GDP) will shrink by 1.5% for the January-to-March period, a sharp reversal from previous estimates.
Consumer Spending and Exports Weigh on GDP
The downgrade follows weaker-than-expected consumer spending and sluggish exports. January’s inclement weather contributed to a 0.2% decline in personal spending, missing the Dow Jones estimate of a 0.1% increase. Adjusted for inflation, consumer spending dropped 0.5%, shaving a full percentage point off GDP growth projections, lowering the expected contribution to just 1.3%.
Additionally, net exports saw a significant decline, with their contribution falling from -0.41 percentage point to -3.7 percentage points, further dragging down overall economic output.
Declining Growth Outlook Raises Concerns
While the GDPNow model is known for its volatility, its downward revision aligns with broader indicators of an economic slowdown. Allianz chief economic advisor Mohamed El-Erian noted the shift, stating, “This is sobering notwithstanding the inherent volatility of the very high frequency ‘nowcast’ maintained by the Atlanta Fed.”
The tracker had initially pointed to GDP growth as high as 3.9% in early February but has steadily declined as new data has emerged.
Labor Market and Bond Yields Flash Warning Signs
The latest data also shows potential trouble in the labor market. Initial unemployment claims reached their highest level since early October, raising concerns about job stability.
Meanwhile, bond markets are signaling slower growth. The 3-month Treasury yield moved above the 10-year note, a historically reliable indicator of an impending recession within the next 12 to 18 months.
Inflation and Federal Reserve Policy Outlook
Despite economic headwinds, inflation data offered some relief. The Commerce Department reported that the core personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation gauge, fell to 2.6% in January, down 0.3 percentage points from December.
Markets are increasingly betting that the Federal Reserve will respond to the slowdown with multiple interest rate cuts this year. Futures trading on the fed funds rate suggests an 80% probability of a 0.25 percentage point cut in June, with expectations for three total cuts in 2025.
Stock Market Volatility Reflects Economic Uncertainty
The economic turbulence has made for a volatile start to the year in equity markets. The Dow Jones Industrial Average is up 2% year-to-date but has experienced significant fluctuations amid the shifting economic narrative.
“My sense is that the complacency that has crept into asset markets is about to be disrupted,” said Joseph Brusuelas, chief U.S. economist at RSM.
Recession Risks on the Horizon
With slowing growth, rising unemployment claims, and bond market warnings, concerns about a potential recession are mounting. The Federal Reserve’s response in the coming months will be critical, as markets watch for policy moves that could help stabilize economic momentum.