Real GDP (Q1-2025, advance estimate)

U.S. economy stagnates, as international trade weighs heavily on Q1 growth 

• The U.S. economy contracted by a meager 0.3% quarter-on-quarter (q/q, annualized) in the first quarter – in line with the consensus forecast – but a sharp reversal from Q4-2024's gain of 2.4%. 
• Consumer spending rose 1.8% q/q, a notable deceleration from Q4's 4.0%. Spending on goods was relatively flat (+0.5% q/q), while services expanded by a healthy 2.4%. 
• Business investment surged 9.8% q/q, as firms appeared to front-load capital spending ahead of the tariffs taking effect. Equipment spending (+22.5% q/q) accounted for the bulk of the gain, though intellectual property products (+4.1 q/q) registered its strongest gain in a year. Structures investment remained relatively flat.
• Residential investment rose by a modest 1.3% q/q, following a gain of 5.5% q/q in Q4. But even with the recent pick-up in activity, housing investment remains over 10% below its 2022 pre-Fed tightening levels. 
• Government spending contracted by 1.4%, as outlays for both federal defense (-8.0% q/q) and non-defense (-1.0%) declined in Q1. State & local spending rose 0.8% q/q.  
• International trade was the main culprit weighing on growth. Imports surged by 41.3% q/q, largely owing to a strong gain in goods imports (+50.9% q/q). Meanwhile, exports rose by a more modest 1.8% q/q, resulting in net trade subtracting 4.8 percentage points (pp) from Q1 GDP. Some of the uptick in imports showed up in inventory investment, which added 2.3pp to headline growth.  
• Final domestic demand slowed, but still expanded by a healthy 2.3% q/q. 
• Core PCE inflation – the Fed's preferred inflation gauge – rose 3.5% q/q (annualized), an acceleration from Q4's 2.6%.

Key Implications

• While the U.S. economy entered 2025 with considerable momentum, the vast policy changes undertaken by the new administration have undermined the growth outlook. The pullback in first quarter GDP was overwhelmingly driven by a sharp widening in the trade deficit, as businesses scrambled to boost inventories ahead of the tariff hikes. There was also evidence of DOGE efforts weighing on growth, with federal spending shaving 0.3pp from Q1 GDP, after largely being a small source of growth in recent years. While private domestic activity held up reasonably well, it's likely the next shoe to drop. 
• There remains considerable uncertainty on the economic outlook. The administration's on-again-off-again tariff approach has eroded consumer and business confidence, pushed the economic policy uncertainty index to levels not seen since the pandemic and has led to a tightening in financial conditions. While consumer spending for March (released at 10:00 am ET) will show some bounce back following a sluggish start to the year, the rebound will in part be driven by a pull-through of big-ticket purchases ahead of the tariffs. This could very well persist into April, though once these effects peter out, consumption is likely to hit a wall. Fixed investment is also at risk of drying up amidst the persistent tariff policy uncertainty, suggesting a more meaningful slowdown in domestic activity is likely on deck over the coming quarters.

Disclaimer

This report is provided by TD Economics. It is for informational and educational purposes only as of the date of writing, and may not be appropriate for other purposes. The views and opinions expressed may change at any time based on market or other conditions and may not come to pass. This material is not intended to be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice. The report does not provide material information about the business and affairs of TD Bank Group and the members of TD Economics are not spokespersons for TD Bank Group with respect to its business and affairs. The information contained in this report has been drawn from sources believed to be reliable, but is not guaranteed to be accurate or complete. This report contains economic analysis and views, including about future economic and financial markets performance. These are based on certain assumptions and other factors, and are subject to inherent risks and uncertainties. The actual outcome may be materially different. The Toronto-Dominion Bank and its affiliates and related entities that comprise the TD Bank Group are not liable for any errors or omissions in the information, analysis or views contained in this report, or for any loss or damage suffered.