Current policy uncertainties and sweeping tariffs imposed by the Trump administration are contributing to a grim economic forecast for the United States, according to the latest Rapid Update from Finance Newso.
The update, which reflects the predictions of 14 economists regarding GDP and inflation, estimates that growth for the first quarter will be a mere 0.3%, a sharp decline from the 2.3% growth recorded in the fourth quarter of 2024. This would mark the slowest growth rate since the economy began its recovery from the pandemic in 2022.
Core PCE inflation, favored by the Federal Reserve as a key measure, is projected to hover around 2.9% for most of the year, with a potential decline expected only by the fourth quarter.
Underlying these bleak GDP projections is fresh evidence indicating that diminishing consumer and business sentiment is manifesting in actual economic activity. The Commerce Department reported that real consumer spending, adjusted for inflation, increased by only 0.1% in February, following a decline of 0.6% in January. Action Economics has since revised its growth forecast for consumer spending down to 0.2% for the current quarter, a stark contrast to the 4% growth seen in the previous quarter.
“The indicators of slowing hard activity data are becoming increasingly persuasive, following an earlier downturn in sentiment,” noted Barclays in a recent analysis.
An additional concern is a surge in imports, which detracts from GDP figures, that seem to have flooded into the U.S. in anticipation of the new tariffs.
Despite these challenges, there is a silver lining: the impact of imports is expected to diminish soon, and only two of the twelve economists surveyed predict negative growth in the first quarter. None of the economists foresee consecutive quarters of contraction. Oxford Economics, which presents the lowest estimate for Q1 growth at -1.6%, anticipates a recovery in GDP of 1.9% in the second quarter, attributing this rebound to the eventual contribution of those imports to growth through inventory and sales measures.
Rising Recession Risks
Most economists project a gradual economic rebound, estimating second quarter GDP growth at an average of 1.4%, with the third quarter increasing to 1.6%, and the final quarter reaching 2%.
However, the risk remains that an economy stagnating at just 0.3% growth could easily tip into negative territory. With additional tariffs set to be implemented this week, uncertainty looms over the sustainability of any recovery.
“While our baseline forecast does not anticipate a decline in real GDP, the escalating global trade conflict and cuts to jobs and funding from DOGE could likely result in GDP contractions in the first and potentially the second quarters of this year,” commented Mark Zandi of Moody’s Analytics. He added that a recession could become probable if the president does not reverse the tariffs by the third quarter.
Moody’s projects dismal growth of merely 0.4% for the first quarter, with expectations for a recovery to 1.6% by the end of the year—significantly below the historical trend.
Persistent inflation will further complicate the Federal Reserve’s response to slowing growth. Forecasts suggest core PCE inflation will remain at 2.8% this quarter, rising to 3% in the following quarter and remaining close to that level until dropping to 2.6% within the next year.
Although the market anticipates potential rate cuts, the Federal Reserve may find it challenging to justify such moves until inflation begins to show a more convincing downward trend later in the year.
