Early indicators for the first quarter of 2025 suggest negative economic growth, according to the Federal Reserve Bank of Atlanta.
The central bank’s GDPNow model, which tracks real-time economic data, now estimates that gross domestic product (GDP) could shrink by 1.5% for the January-to-March period, as per an update posted Friday morning.
Weaker-than-expected consumer spending during January’s severe weather and sluggish exports contributed to the downward revision. Before Friday’s report, GDPNow had projected 2.3% growth for the quarter.
Though the model is highly volatile and tends to be more reliable later in the quarter, it aligns with other indicators pointing to an economic slowdown.
“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, stated in a post on social media platform X.
The tracker had projected GDP growth as high as 3.9% in early February but has steadily declined as additional data emerged.
On Friday, the Commerce Department reported that personal spending in January declined by 0.2%, falling short of the Dow Jones estimate of a 0.1% increase. After adjusting for inflation, spending dropped 0.5%. Consequently, GDP growth expectations were lowered by a full percentage point to 1.3%, according to GDPNow estimates.
Additionally, net exports’ contribution to GDP declined significantly, falling from -0.41 percentage point to -3.7 percentage points.
The combination of these figures and their broader implications come amid rising concerns over inflation and weakening consumer confidence. The Commerce Department also reported that the Fed’s preferred inflation gauge, the core personal consumption expenditures price index, dropped to 2.6% in January, down 0.3 percentage point from December.
The labor market also showed signs of stress, as initial jobless claims reached their highest level since early October.
In financial markets, the bond market has been reflecting expectations of slower growth. The 3-month Treasury yield climbed above the 10-year note this week, a historically reliable indicator of a potential recession within the next 12 to 18 months.
Economic uncertainty and shifting policy expectations have contributed to a volatile start for the stock market in 2025. The Dow Jones Industrial Average is up 2% for the year, though fluctuations have been frequent due to unpredictable economic news.
“My sense is that the complacency that has crept into asset markets is about to be disrupted,” said Joseph Brusuelas, chief U.S. economist at RSM.
Market sentiment increasingly suggests that the Federal Reserve may respond to the slowdown with multiple interest rate cuts in 2025. As of Friday afternoon, traders in the fed funds futures market raised the probability of a quarter-point rate cut in June to around 80% and priced in the likelihood of three cuts overall this year.
SOURCE - https://www.atlantafed.org/cqer/research/gdpnow
Last modified: March 1, 2025
