TLDR
- U.S. economic growth expected to slow significantly in Q1 2025, with estimates ranging from 0.2% to 0.8% annualized rate
- Surge in imports due to businesses front-loading ahead of Trump tariffs contributed to economic slowdown
- March PCE inflation expected to cool to 2.2% year-over-year, down from February’s 2.5%
- Stock futures pulled back as markets await Big Tech earnings from Microsoft and Meta
- Trump signed Executive Order reducing some auto tariffs while maintaining 145% tariff rate on China
The first quarter of 2025 is likely showing signs of economic strain as businesses and consumers scramble to adjust to President Donald Trump’s new tariff policies. Economic data set for release today is expected to reveal a slowdown in growth while Wall Street braces for earnings reports from tech giants Microsoft and Meta.
U.S. economic growth appears to have hit a speed bump during the first quarter of 2025. The Bureau of Economic Analysis will release its first estimate of inflation-adjusted GDP growth today, with economists projecting annualized growth of just 0.2% to 0.8%. This represents a sharp decline from the fourth quarter’s 2.4% rate.
The slowdown can be linked to a surge in imports as businesses rushed to stock up on goods before Trump’s tariff hikes took effect. Import levels shattered previous records in the first quarter according to Census data, which has increased the trade deficit and negatively impacted GDP calculations.
Consumer Spending and Inflation Trends
Consumer spending also appears to have cooled during the first quarter. Citi economists expect annualized consumer expenditures to show growth of just 1.3%, down from the 4.2% rise seen in the fourth quarter of last year.
Despite economic growth concerns, inflation appears to be on a cooling trend. Economists surveyed by FactSet expect March’s Personal Consumption Expenditures (PCE) price index—the Federal Reserve’s preferred inflation gauge—to show headline inflation of 2.2% year-over-year, down from February’s 2.5% rate.
Core inflation, which excludes food and energy prices, is expected to measure 2.6% year-over-year compared to February’s 2.8%. On a monthly basis, analysts expect core inflation to rise just 0.1% from February to March.
The cooling inflation data could potentially give the Federal Reserve room to consider interest rate cuts in response to weakening economic conditions. However, economists caution that it’s likely too early for the inflation data to show evidence of any boost due to higher tariffs.
Market Reaction and Future Outlook
U.S. stock futures pulled back on Wednesday as markets digested these economic developments. Dow Jones Industrial Average futures slipped 0.2%, S&P 500 futures dropped 0.4%, and contracts on the tech-heavy Nasdaq 100 slid 0.5%.
Wall Street’s attention is now turning to earnings reports from Microsoft and Meta, both scheduled for release after market close today. Microsoft faces mounting pressure to deliver profits on its AI investments, while investors are closely watching how tariffs might impact Meta’s business.
President Trump has continued to make moves on trade policy. He recently signed an Executive Order reducing some tariffs affecting automakers, while Commerce Secretary Howard Lutnick suggested a trade deal with an unnamed country was completed.
However, Trump maintained his hard stance on China, stating he believed China would “eat” the U.S.’s tariffs and limit their impact on American consumers. He defended the 145% tariff rate on China, saying the country “deserved” it.
Looking ahead to the second quarter, economists expect the surge in imports to fade. This, paired with more front-loading of consumer spending, could boost second-quarter GDP, though many economists still expect modest growth overall in 2025.
Labor costs are also expected to show signs of moderation. Economists estimate that the employment cost index rose by 0.95% during the first quarter compared to the fourth quarter, with a year-over-year rate of 3.7% for the first quarter—a slight decrease from the fourth quarter’s 3.8%.
With businesses signaling caution about adding workers in reaction to the enacted tariffs and economic uncertainty, wage growth is expected to remain limited in the months ahead.
The data being released today will reflect “quirks in how the data are calculated” according to Michael Pearce, deputy chief U.S. economist for Oxford Economics, and may not provide a reliable outlook for economic conditions moving forward.
Speculation continues about whether the U.S. and China are in trade talks and which country might make the first major move to ease tensions.
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