Post from First Trust Economics Blog

Brian S. Wesbury – Chief Economist
Robert Stein, CFA – Deputy Chief Economist 

April 21st, 2025

We’ve expected a recession for more than a year now.

Simply put…the Era of Easy Everything is Over. Expanding

deficits and easy money (that have lifted the economy since

COVID) are no longer with us. At the same time, tariff

negotiations have created an unbelievable amount of

uncertainty. Add it all up and we expect 0.3% real GDP

growth in the first quarter.

Consumers and businesses were front-running tariffs in

Q1, trying to get as many goods into the country as soon as

possible before higher tariffs took effect. But if a business is

thinking of systematically maneuvering around higher tariffs,

by moving operations into the US, they need more certainty

about what those tariffs will be and how long those tariffs will

last. Once the rules are set, business will accommodate them.

As a result, it remains to be seen whether economic

growth will pick back up in the second quarter. If not, worse

may be ahead.

In the meantime, after two years of artificially boosting

growth by expanding the budget deficit to unprecedented

peacetime levels when the unemployment rate has hovered

near 4%, fiscal policy has suddenly become contractionary,

with discretionary spending cuts related to DOGE and

otherwise, while tariffs boost tax revenue.

Hence, our forecast of near zero growth in Q1, with one

big caveat, which is that the day before the government

releases the official GDP report it provides new data on

inventories and international trade for March. Given the

volatility of the trade figures, it’s possible we update our

forecast substantially that day.

Consumption: Auto sales declined at a 3.0% annual rate

in Q1 while “real” (inflation-adjusted) retail sales excluding

autos slipped at a 1.3% rate. However, most of consumer

spending is services and real service spending appears up a

slow 1.3% pace, bringing our estimate of real consumer

spending on goods and services, combined, to a 0.7% rate,

adding 0.5 points to the real GDP growth rate (0.7 times the

consumption share of GDP, which is 68%, equals 0.5).

Business Investment: We estimate a 3.6% growth rate

for business investment, with gains in equipment leading the

way. A 3.6% growth rate would add 0.5 points to real GDP

growth. (3.6 times the 14% business investment share of GDP

equals 0.5).

Home Building: Residential construction was roughly

unchanged in the first quarter, buffeted between a lack of

housing supply (which should boost growth) and higher

mortgage rates (which should dampen construction). Home

building looks like it was flat, which would mean it neither

added to nor subtracted from real GDP growth.

Government: DOGE and other Trump Administration

efforts are cutting back on federal payrolls and transfers to

NGOs, but only direct government purchases of goods and

services (not government salaries or transfer payments) count

when calculating GDP. We estimate these purchases were up

at a 1.2% rate in Q4, which would add 0.2 points to the GDP

growth rate (1.2 times the 17% government purchase share of

GDP equals 0.2).

Trade: The trade deficit soared in the first quarter as

businesses were busy front-running tariffs. However, some of

the increase in the trade deficit was due to imports of non-

monetary gold, which won’t influence GDP. The remainder,

caused by other goods, will be counted. This forecast may

change a great amount when the “advance” report on trade

arrives the morning of Tuesday April 29, but for now we’re

projecting net exports will reduce the Q1 real GDP growth

rate by 0.9 percentage points.

Inventories: Inventory accumulation looks like it ran at

the same slow pace as in Q4, translating into zero net effect

on the growth rate of real GDP.

Add it all up, and we get a 0.3% annual real GDP growth

rate for the first quarter. Barely positive, and we will revisit

the forecast when we get that crucial report on trade and

inventories in eight days.

We do expect government spending to slow in the

quarters ahead. At the same time, monetary policy is no

longer easy. In other words, the jury is out on whether the

first quarter is a sign of things to come. We still think the US

has to experience economic pain in order to move to a more

sustainable long-term policy environment. Getting there is

creating a great deal of uncertainty. Stay cautious.