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Q1 US GDP Contraction | Core PCE Moves Higher

 ​The U.S. economy contracted by 0.3% in the first quarter of 2025—the first decline since early 2022—while core inflation accelerated, raising concerns about stagflation.​

📉 Q1 2025 GDP Contraction: What Happened?

  • GDP fell 0.3% on an annualized basis, reversing the 2.4% growth in Q4 2024.

  • The primary driver was a 41.3% surge in imports as businesses rushed to stockpile goods ahead of President Trump's new tariffs, which subtracted over 5 percentage points from GDP.

  • Consumer spending slowed to a 1.8% growth rate, down from 4% in Q4 2024, with durable goods spending declining by 3.4%.

  • Federal government spending decreased by 5.1%, partly due to budget cuts implemented by the Department of Government Efficiency.

  • Business investment rose by 21.9%, likely driven by preemptive purchases ahead of the tariffs.

📈 Inflation: Core PCE Re-Acceleration

  • The core Personal Consumption Expenditures (PCE) price index—the Federal Reserve's preferred inflation measure—rose at a 3.5% annual rate in Q1, up from 2.6% in Q4 2024.

  • The broader headline PCE inflation increased to 3.6%, indicating persistent inflationary pressures.

⚠️ Economic Outlook: Stagflation Concerns

  • The combination of economic contraction and rising inflation has raised fears of stagflation—a scenario characterized by stagnant growth and high inflation.

  • Labor market indicators showed weakness, with private employers adding only 62,000 jobs in April, below expectations.

  • Financial markets reacted negatively, with major indices experiencing significant declines following the GDP report.

🏦 Federal Reserve Policy Implications

  • The Federal Reserve faces a challenging environment, balancing the need to address inflation with the risk of further economic slowdown.

  • Market expectations for a rate cut have increased, with a 64% chance of a cut by June, as investors anticipate the Fed's response to the evolving economic landscape.

🔮 Looking Ahead

  • Economists anticipate that the import surge will reverse in subsequent quarters, potentially alleviating some downward pressure on GDP.

  • However, the impact of tariffs, consumer spending trends, and inflation dynamics will be critical factors influencing the economic trajectory in the coming months. 



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Location: Indiana, USA

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