Q1 2025 Outlook

The latest data suggest the U.S. may print a negative real GDP number in the first quarter, but that alone does not mean the economy is in recession.

Are we already in a recession?

Most traditional indicators still point to a slowing but growing economy, not a fullblown recession. A negative Q1 real GDP print—Atlanta Fed tracking has dipped into negative territory before—can happen even in the middle of an expansion, especially when data are distorted by weather, oneoff shocks, or trade timing.

What the recent data are telling us

Recent numbers show clear softness: retail sales have slipped, housing activity has cooled, manufacturing output has edged down, and initial jobless claims have risen from a year ago. These are the kinds of data points that typically show up as the economy downshifts, and they warrant close attention from investors and business owners.

At the same time, recession models and labormarket indicators such as the Sahmstyle unemployment triggers and weekly recession gauges remain below their recession thresholds, implying elevated risk but not a confirmed downturn. Historically, recessions become much more likely when job losses accelerate sharply and unemployment spikes, which has not yet occurred.

Why Q1 GDP may be negative

The mechanics of GDP accounting matter here. GDP is calculated by adding up consumer, business, and government spending, then subtracting imports because they are not produced domestically. A surge in imports—particularly of industrial supplies and goods pulled forward ahead of tariff changes—can mathematically push real GDP into negative territory even if underlying demand is reasonably stable.

In the current environment, higher tariffs and tariff uncertainty have encouraged many importers to “frontrun” future costs by bringing in more product now. That bulge in imports depresses measured Q1 GDP but is likely to reverse as inventories normalize, which could set up a temporary rebound in reported growth in subsequent quarters.

Policy shifts, spending cuts, and nearterm pain

The administration’s push to cut federal spending and target certain programs is another important crosscurrent. In the long run, lower structural deficits can support healthier growth, but in the short run, reductions in government outlays and related employment can create localized layoffs and spending pullbacks, especially for households and businesses that have relied heavily on government payments.

For business owners and investors, this mix of higher tariffs, spending restraint, and tighter financial conditions creates a more volatile backdrop where sectorbysector outcomes can diverge sharply. Exporters, capitalgoods producers, and firms tied to government contracts may feel the strain first, even if the broader economy avoids an immediate recession.

How to interpret a negative Q1

Putting it all together, a single quarter of negative real GDP—especially one driven in large part by an import surge—is not, on its own, definitive proof that the U.S. is in recession. It is a warning sign that should prompt closer monitoring of the labor market, credit conditions, and corporate earnings rather than a reason to assume the business cycle has already turned.

For now, the U.S. appears to be in a latecycle slowdown with rising recession risk, not yet in a formally dated recession. Prudent strategy is to stay alert to confirmation from employment and income data, stresstest portfolios and business plans for a downturn, and avoid overreacting to one noisy GDP print in isolation.

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