The U.S. economy has entered into negative territory on GDP for the first quarter of 2025. That’s not good, and it worse than what was expected. It would be naive to ignore the headlines of -0.3% GDP and the consequences of what negative GDP really means. That said, the reality is that the first quarter of 2025 was negative because of 1) a huge surge of imports before tariffs kick in and 2) a decline in government spending. And none of this smoothing-over should be interpreted as though there are not risks of a recession.
How you even define a recession yourself may vary wildly from how others define a recession. There is an old joke, if it’s ok to joke about future suffering — “A recession is when your neighbors lose their job, a depression is when you lose your job.”
The classical definition of a recession used to be measured by two consecutive quarters of negative GDP, more or less. Defining a recession in the modern era is more complex. The National Bureau of Economic Research is the body which officially declares when the U.S. economy has entered into a recession. It is no longer just two consecutive quarters of a decline in real GDP.
Now the definition of a recession is a significant decline in economic activity spread across the economy and lasting more than a few months — generally seen in real GDP, real income, employment, industrial production, and wholesale-retail sales. Frankly, by the time the NBER admits the economy is in a recession everyone already knows it and it’s already too late.
Back in 2022, the recession risks were also blaring. It wasn’t over tariffs. It was the post-Covid economy and most people who were working from home or commuting into the office occasionally were running out of government stimulus money. And the stock market was down over 20% from its high (a true bear market) – versus the S&P 500 down about 6% year-to-date at this time.
Russia had also invaded Ukraine in 2022 and commodity prices were through the proverbial roof. The U.S. Federal Reserve was raising interest rates non-stop as inflation was ramping up, the yield curve was inverted, housing sales were in the toilet, and consumer and business sentiment were also in the toilet. If part of this sounds familiar to 2025, it should.
The key difference in 2025 is the beginning of the “negative GDP” was way worse in 2022 at -1.5% (before adjustments) back then. Tariff news and trade war news headlines are dominating the daily news flow rather than Russia-Ukraine. Businesses and consumers are struggling to know how much tariffs will be and how to prepare for them. The job market is still healthy from an unemployment measurement, but everyone is on edge from employees to consumers to retirees to business.
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Another difference in 2025 is one that we all have to recognize. President Trump in power rather than Joe Biden. This is a situation that the media will not admit until they have to, but the motto of “Attack Trump for any and all reasons” in 2025 has replaced “Defend Biden at any and all costs” in 2024. That is sad, but after having seen this move before it is also understandable.
Politics aside, breaking down the -0.3% GDP report for the first quarter of 2025 is not at all like analyzing a traditional GDP report. The Commerce Department’s own chart broke down the impact that each portion of GDP actually contributed the most to the negative GDP report — the huge increase in imports was the main culprit.
Imports rose by 41.3%, while exports rose only 1.8%. The simple math behind production and consumption is that imports take away from GDP and exports add to GDP.
And the preliminary report also showed that current-dollar GDP, unadjusted for price gains/cuts, was +3.5% in Q1-2025. And the decrease in total government spending actually showed a decrease in federal government spending while state and local government spending was up.
Now look at the spending. There was close to a 1% drop in government spending in the first quarter. Whether or not that can be credited to DOGE is up for debate, but the fiscal 2025 federal budget was already set into motion in 2024. Here are the major items that usually impact GDP:
- Real final sales to private domestic purchasers, +3.0% in Q1 vs. +2.9% in Q4
- Consumer spending, it rose by 1.8%
- Business investment (big ticket items), it rose 9.8%
According to the Bureau of Economic Analysis regarding the drop in GDP:
The decrease in real GDP in the first quarter primarily reflected an increase in imports, which are a subtraction in the calculation of GDP, and a decrease in government spending. These movements were partly offset by increases in investment, consumer spending, and exports.
The BEA data also showed that prices were higher in Q1/2025 than in Q4/2024:
- Price index for gross domestic purchases +3.4% in Q1 vs. +2.2% in Q4
- Personal consumption expenditures (PCE) price index +3.6% in Q1 vs. +2.4% in Q4
- PCE price index ex-food and energy +3.5% in Q1 vs. +2.6% in Q4
President Trump ran his race with tariffs as one of his key economic issues. Where the “Trump Bump” went bump in the night is that the tariff news immediately escalated into a trade war with multiple partners and adversaries alike with likely costs looking much higher than had been expected.
Businesses, individuals and foreign governments currently just do not know how to plan or forecast. This was seen in the pulling-forward orders to build up inventories and has been seen in more than just a few earnings reports concerning sales/earnings guidance for the rest of 2025.
The reality is that the United States is not in a recession, not yet. The risks are very much there and many market forecasters are duking it out over whether the U.S. will enter a true recession or not. And again, it would be naive to consider that even a “technical” contraction in GDP does not matter. It does matter.
Several issues to consider…
- Nations have been charging higher tariffs against U.S. goods coming into their market for years.
- Tariffs and trade wars will not last forever.
- Businesses will learn to adapt by whatever means they have available.
- Consumers will still have to buy goods and pay for services.
- The quest to boost domestic production will likely result in stronger economics here.
- Over half of the country wants the government to spend less money.
- Tax reform, or continued tax policy, is the forgotten part of the docket for the time being.
- Interest rates are still much higher than the base case ahead would dictate.
- The U.S. is still the largest global market of them all.
Again, there is no reason to be naive and think that negative GDP doesn’t matter. At the end of the day, GDP is one of the key measures to judge the performance of any economy. There is also a reason to pause and review what’s actually driving this data.
The recession risks are real. But the odds of an immediate recession are currently still lower than they were at the start of April when stock prices were falling rapidly and bond yields were rising.
