First-of Q1 US GDP growth chilled to 1.6%, market nerves rattle on inflation
The U.S. economy expanded at a 1.6% pace in the first quarter of 2025, an annualized rate, based on a Commerce Department report on Wednesday that showed a marked deceleration from the 3.4% rate of growth in Q4 2024. The softer-than-expected GDP numbers have heightened fears about persistent inflation, and what it would mean for consumer spending, sparking stock market news and speculation on the direction of the Federal Reserve.
Drivers Behind the Deceleration
The Q1 GDP report also lays out a distinct cooling in consumer spending, which increased 2.2% versus 3.3% in the prior quarter, as higher prices for things like housing and energy were squeezing household budgets. Business investment also slowed, up only 0.8 percent, and government spending declined for the first time in three years.
Economists blame the Federal Reserve’s aggressive rate hikes starting in 2023 for squelching growth. The most recent PCE report, the Fed’s preferred measure of inflation, showed that prices had increased 3.7 percent from a year earlier in March — well above the central bank’s 2 percent target.
Responses of the stock market and the economy
Mixed reactions were seen when stock market news concerning the GDP came out. Major indices were volatile as investors absorbed a tepid Q1 GDP. For some, the slowdown was a healthy adjustment following last year’s torrid growth; others fretted that it could spread to the rest of the market.
Peter Navarro, which served as an economic adviser for Donald Trump, opined: Peter’s take: The GDP report today demonstrates we need to refocus on pro-growth policies. “The U.S. economy is at an existential crossroad,” Navarro said, sounding notes from the arguments over the economy in the Trump era.
Market Impact and Political Repercussions
Stock markets fell after the release of the G.D.P. data, with the S&P 500 down 1.5 percent in early trading. Shareholders are worried that because of the high interest rates for a long time to come might add to the pressure in the US economy. Former President Donald Trump blasted The Biden administration’s approach to the economy, calling the GDP numbers “a disaster for American workers” in a Truth Social post.
Former White House economist Peter Navarro agreed: “The policies of this administration are strangling growth. “We must have tax cuts and an end to deregulation now in order to prevent a recession.”
What’s Next for the Fed?
Analysts are split over whether the Fed will stand pat or proceed to tap the brakes on inflation. CME Group’s FedWatch Tool supports a 58% likelihood of a 0.25% rate hike in June. Yields on Treasurys, meanwhile, rose as bond markets priced in tighter monetary policy.
The Bottom Line
Its economy may be still growing in Q1 but the US economy moving into a stall points to increasing headwinds. As markets prepared for next week’s publication of the PCE report and jobs data remained — all raising the specter of more market turbulence.
Disclaimer: This article is for informational purposes only. Look for a financial professional to discuss investment options with. Data from US Commerce Department, third-party suppliers.
