U.S. Economy Contracts in Q1 2025, But Private Demand Holds Up

The advance GDP estimate released by the Bureau of Economic Analysis shows that the U.S. economy shrunk by -0.3% (annualized) in Q1 2025—marking the first quarterly contraction since the 2022 slowdown.

Despite the negative headline number, underlying private sector strength remained:

• Final sales to private domestic purchasers rose +3.0%
• Private investment and consumer spending increased
• Exports rebounded

However, a surge in imports (especially consumer and capital goods) and a drop in federal government spending, particularly in defense, outweighed domestic gains.

Inflation pressures also resurfaced:

• Core PCE rose +3.5%, up from +2.6% last quarter
• Headline PCE price index climbed +3.6%

This complex mix of softening GDP and sticky inflation will pose challenges for policymakers, especially the Federal Reserve as it weighs interest rate decisions in the coming months.

Key Takeaway: While headline GDP declined, private sector demand remains solid. The drag came largely from imports and federal cuts—not from a collapse in consumer or business activity.

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