Macro Pulse – US GDP (Q1 2025 – first estimate)

Tariff anxiety fuels imports surge

• Real GDP contracted at a 0.3% annualized pace in Q1 2025, reversing the robust 2.4% expansion seen in Q4 2024. While a superficial reading might attribute this downturn to the newly imposed tariffs, the contraction was largely a function of economic activity being pulled forward as importers, businesses and consumers rushed to get ahead of the tariff implementation. This artificial front-loading of demand sets the stage for a sharper demand cliff in Q2 — a far more troubling phase of the ongoing economic slowdown.
  
  
• What are the main takeaways?
   
  • Domestic demand was artificially robust in Q1, with final sales to private domestic purchasers up 3.0% on the quarter and 3.0% year over year (y/y) on a pull-forward of demand. 
    
    
  • Imports surged 41% — the largest since 1972, excluding the post-pandemic rebound — as businesses front-ran tariffs and filled up inventories. Net trade represented a 4.8 percentage points (ppt) drag on GDP growth that was partially offset by a 2.3ppt contribution from inventories.
    
    
  • Consumer spending rose a modest 1.8%, adding 1.2ppt to growth, but the key private sector surprise in this report was business investment accelerating 9.8% on a 22.5% surge in equipment investment. Information processing equipment skyrocketed 69%, adding 1ppt to GDP growth — the largest boost ever.
    
    
  • Government spending contracted by the most in three years, down 1.4% in Q1, with federal government outlays falling 5.1% — also the largest decline in three years.
    
    
  • Headline and core personal consumption expenditures (PCE) inflation were stable at 2.5% and 2.8% y/y, respectively, but monthly data shows that inflation was still converging toward the Federal Reserve’s 2% target in March, supported by strong productivity growth. Of course, this was before the onset of a new inflationary era of hyper-protectionism.
    
    
  • The Fed will remain on hold at the upcoming May Federal Open Market Committee (FOMC) meeting, but it may consider a rate cut in June if the hard data starts reflecting a pronounced growth slowdown.
     
• Changes in US trade policy are having a profound impact on the global economy and financial markets. The US administration’s on-off tariff policy has led to a confidence crisis with businesses favoring a wait-and-see approach in the face of historically elevated policy uncertainty. US consumer sentiment gauges have plunged to their lowest levels since the 1980s while forward-looking business confidence measures are at multiyear lows. 
  
  
• And while this malaise has yet to precipitate a retrenchment in consumer spending and business investment, massive disruptions to trade flows (with cargo volumes from China down 40% over the past few weeks), persistent policy uncertainty and heightened market volatility pose significant risks to the US economic outlook. 
  
  
• We have cut our real GDP growth forecast to 1.1% for 2025 and 2026. Importantly, real GDP is expected to approach stall speed in Q4 with growth at only 0.2% y/y. While we see the odds of a recession in the next 12 months around 45%, risks to the outlook are tilted to the downside.
  
  

In the details:
 

Consumer spending grew a modest 1.8% in Q1 — the smallest advance since Q2 2023 — following a robust 4.0% advance in Q4 2024. Consumer spending on durable goods fell 3.4% — the largest decline since 2021 — with cutbacks on outlays on cars and slower spending on furniture and recreational goods and vehicles. This comes even as consumers were trying to front-run tariffs in March. Nondurable goods outlays rose a modest 2.7% on stronger spending on clothing and groceries. Services outlays only rose 2.3% — the slowest advance since Q3 2023 — with a pullback of spending at restaurant and bars but still healthy spending on transportation and recreation. Spending on health care and utilities remained on trend.
 

Business investment growth surged to 9.8% annualized — the highest since Q2 2023 — led by a 22.5% surge in equipment investment — the largest since 2011 if you exclude the post-pandemic rebound. This was essentially driven by a 69.3% surge in information processing equipment adding 1ppt to GDP growth — the largest boost ever. Businesses were front-running tariffs by ordering computers and communication equipment. Investment in intellectual property products rebounded 4.1% on stronger software investment. Meanwhile, private structures outlays only rose 0.4%, reflecting ongoing affordability constraints and growing labor headwinds for construction. 
 

Residential investment rose 1.3% in Q1 following a 5.5% advance in Q4 2024. The housing market is expected to stay stagnant, as slowing income growth, persistently high borrowing costs, rising input costs from tariffs and labor supply constraints from reduced immigration continue to pressure costs and limit demand. 
 

Imports surged 41% — the largest since 1972, excluding the post-pandemic rebound — as businesses front-ran tariffs and filled up inventories. Imports of consumer goods and autos led the surge. On the export side, momentum was more subdued with exports rising 1.8% in Q1 as a 3.2% rise in goods exports was offset by a 0.7% decline in services exports — with foreign travel to the US falling for the first time since the pandemic — a likely indication of reduced appetite for US tourism. 
 

Net trade represented a 4.8ppt drag on GDP growth that was partially offset by a 2.3ppt contribution from inventories. We expect trade will be a major boost to growth in Q2, but it will be offset by inventory destocking and a likely private sector demand cliff. 
 

Government spending fell by the most in three years, down 1.4% in Q1, with federal government outlays falling 5.1% — also the largest decline in three years — and state and local government spending up 0.8%. Whereas government spending provided a tailwind to the economy over the past few years, we’re now witnessing a reversal. We anticipate Department of Government Efficiency (DOGE) cuts and forthcoming cuts to entitlement spending (to offset the cost of tax cuts) will lead to a further government sector drag on the economy in the coming quarters.
 

On the inflation front, headline PCE inflation was steady 2.5% y/y and core PCE remained unchanged at 2.8% y/y. Despite the idiosyncratic price bumpiness, economic fundamentals remained disinflationary through Q1. In fact, the monthly data shows that core PCE inflation eased 0.3ppt to 2.6% y/y in March — within a tenth of its lowest level post-pandemic. Looking ahead, however, tariffs, confusion around trade policy and tighter immigration policy mean the risks to inflation are tilted to the upside.