Early economic signals for the first quarter of 2025 suggest a troubling trend of contraction, as indicated by the Federal Reserve Bank of Atlanta's GDPNow tracker. The tracker, which analyzes incoming data, projects a 1.5% shrinkage in gross domestic product (GDP) for the January-through-March period. This downturn reflects a significant decline from earlier estimates that projected GDP gains as high as 3.9% in February.
Contributing to this forecast is a mix of declining consumer activity and unsettling market indicators. The core personal consumption expenditures price index fell to 2.6% in January, a decrease of 0.3 percentage points from December. Additionally, the Commerce Department reported a 0.2% drop in personal spending for January, falling short of the Dow Jones estimate for a 0.1% increase, with inflation-adjusted spending dropping 0.5%.
The bond market is also echoing recessionary concerns. The yield on the 3-month Treasury bill has surpassed that of the 10-year note, a historically reliable recession predictor over a 12- to 18-month horizon. Meanwhile, initial unemployment claims have reached levels not seen since early October, suggesting underlying weaknesses in the labor market.
"This is sobering notwithstanding the inherent volatility of the very high frequency 'nowcast' maintained by the Atlanta Fed." – Mohamed El-Erian, chief economic advisor at Allianz and president of Queens' College Cambridge.
The stock market is experiencing volatility as well, despite being up 2% year-to-date in 2025. The economic turbulence has resulted in fluctuations, with traders adjusting their expectations for Federal Reserve actions. As of Friday afternoon, the probability of a quarter percentage point rate cut in June has risen to approximately 80%, with the potential for three such cuts throughout the year.
"My sense is that the complacency that has crept into asset markets is about to be disrupted." – Joseph Brusuelas, chief U.S. economist at RSM.
In addition to these factors, the expected contribution to GDP has been reduced to 1.3%, according to GDPNow calculations. The Commerce Department also noted a decline in an inflation measure favored by the Federal Reserve, adding to the uncertainty clouding the economic outlook.