The US economy contracted by 0.2% from January through March of 2025. This is the second Q1 estimate provided by the US Commerce Department, with a third on the way on June 26.
Imports surged into the US during Q1 as corporations aimed to avoid incoming tariffs. The 42.6% uptick in imports marked the fastest pace of goods arriving in the US since Q3 2020. Business investment rose 24.4% in Q1, with business inventories adding 2.6 percentage points to overall GDP. Federal government spending fell by 4.6%, the largest drop in three years, but a deduction from overall GDP calculations.
Real consumer spending rose by 1.2%, albeit far less than the 4% posted during Q4 2024 and revised down from the first reading of 1.8%. Other reports indicate that Americans are spending far more on the essentials like utilities, health care, and housing. The Fed’s preferred inflation measure (PCE price index) rose 3.6%. Persistent inflation has led to cautious consumer behavior and a decline in demand for goods, contributing to the overall weakened reading for Q1.
Discretionary retail fell by 3% this quarter to 23% as consumers are less likely to purchase items like clothing, furniture, and electronics. Durable goods experienced a significant decline of 19%. The University of Michigan’s survey noted that decreased confidence has caused the demand for big-ticket items to decline. A lot of the demand we did see in Q1 was spending to offset anticipated tariffs. Autos, for example, rose by 11% YoY in March alone, and Q1 saw an overall 4.8% in auto purchases. That trend is not expected to continue as consumer sentiment is low.
April’s 2.3% CPI reading was the smallest annual increase since 2021, yet still above the 2% target set by the Fed years ago. The Fed isn’t fighting inflation. That phase is over. What they’re really fighting now is a collapse in confidence in the bond market, the dollar, and in the entire public sector. There will be no soft landing as once anticipated, as we are currently in a stage of stagflation.
Meanwhile, Fed Chair Jerome Powell met Trump at the White House on Thursday to declare that rate decisions would be based on “careful, objective, and non-political analysis.” “I’ve never asked for a meeting with any president, and I never will,” Powell said. “I wouldn’t do that. There’s never a reason for me to ask for a meeting. It’s always been the other way.” Trump invited Powell to the White House to encourage him to cut rates at the June meeting. The markets were pricing in a rate cut in June but now that does not seem as likely.
Trump fails to realize that the Fed is attempting to preserve confidence in the US, primarily in the debt market. We are witnessing cash deficits of over $1 trillion per quarter. Moody’s recently downgraded the US and no longer believes that Treasuries are a certain bet. The government is broke and the Fed must maintain the illusion of solvency.
