The U.S. economy shrank in the first quarter of 2025

The gross domestic product dipped 0.3% from January through March

By Mark Huffman of ConsumerAffairs

April 30, 2025

• U.S. economy shrank 0.3% in Q1 2025, reversing the 2.4% growth seen in Q4 2024.

• Rising imports and falling government spending drove the GDP decline, despite gains in consumer spending, investment, and exports.

• Inflationary pressures intensified, with the PCE price index rising 3.6% and core inflation (excluding food and energy) hitting 3.5%.

The first sign of a potential recession has appeared in the U.S. economy. The U.S. Bureau of Economic Analysis, in its first estimate of first quarter gross domestic product, reports the economy shrank by 0.3% after rising 2.4% in the fourth quarter of 2024.

The official definition of a recession is two consecutive quarters of negative growth.

The primary causes of the economic pullback were a notable increase in imports, which subtract from GDP calculations, and a downturn in government spending. These factors outweighed continued, albeit slower, growth in consumer expenditures, as well as gains in private investment and exports.

Slower consumer spending

The BEA reported that the downturn from Q4 to Q1 was characterized by an upturn in imports, a deceleration in consumer spending, and reduced public sector expenditure. While business investments and exports rebounded, they were insufficient to fully offset the negative impacts.

Despite the headline GDP contraction, some underlying components of the economy showed strength. Real final sales to private domestic purchasersa measure that excludes trade and government activity and reflects core demand from U.S. consumers and businessesrose by 3.0%, a slight increase from 2.9% in the previous quarter. This suggests that private-sector demand continues to underpin economic activity, even amid broader headwinds.

Inflation accelerates

Inflationary pressures also intensified in the first quarter. The price index for gross domestic purchases, which tracks the prices paid by U.S. residents, rose 3.4%, up from 2.2% in the fourth quarter of 2024. The personal consumption expenditures price indexa key inflation gauge for the Federal Reserveclimbed 3.6%, while core PCE inflation, which excludes the more volatile food and energy categories, rose by 3.5%.

The advance estimate may be subject to revisions as more complete data become available in the coming months. Still, the early figures suggest that while the broader economy encountered turbulence in early 2025, private sector activity remains relatively robust.

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