The latest update from the Atlanta Federal Reserve’s GDP tracker suggests that the U.S. economy is heading toward a 1.5% contraction in the first quarter, a stark shift from the 2.3% growth forecasted just days ago. This also represents a sharp decline from the previous quarter when the economy expanded by 2.3%. Several economic indicators have begun signaling trouble as businesses and consumers prepare for the impact of Trump’s tariffs and reductions in federal jobs.
Less than two weeks ago, the U.S. economy appeared to be on stable ground, but a series of troubling indicators have since emerged. The most dramatic development occurred on Friday when the Atlanta Fed’s GDPNow tracker revised its first-quarter estimate from 2.3% growth on February 19 to a 1.5% contraction.
This sudden shift also marks a notable downturn from the fourth quarter’s 2.3% economic growth, which had reinforced the notion of “American exceptionalism.” The U.S. had previously appeared resilient compared to other major economies like China and Europe, both of which were experiencing economic slowdowns.
According to the Atlanta Fed, this abrupt reversal is due to new data on the U.S. trade deficit, which acts as a drag on growth, along with declining consumer spending.
On Friday, the trade balance in goods revealed a record $153.3 billion deficit for January, driven by a surge in imports totaling $34.6 billion, while exports increased by only $3.3 billion.
Although most of former President Donald Trump’s tariffs have yet to take effect, businesses and consumers have been stockpiling imported goods since the election to avoid potential price increases. The latest durable goods orders report, which showed an increase, may also be evidence of a rush to purchase imports before costs rise further.
Despite this spike in imports, overall demand appears to be weakening. Separate data released on Friday showed that Americans cut their spending in January at the fastest rate in four years. While unseasonably cold weather may have played a role, Trump’s policies—particularly plans to significantly reduce federal spending and shrink the workforce—have also contributed to the decline.
“Increased uncertainty surrounding trade, fiscal and regulatory policy is casting a shadow over the outlook,” said Lydia Boussour, a senior economist at EY, in an interview with the Associated Press.
Several other economic indicators are flashing warning signs. Jobless claims increased last week as layoffs linked to DOGE impacted the labor market, pending home sales fell to record lows, and consumer confidence declined due to concerns over tariff-driven inflation.
Additionally, regional Federal Reserve surveys have reported a deteriorating economic outlook, along with declining plans for capital investments.
However, a single quarter of economic contraction does not necessarily indicate a recession. The widely accepted definition of a recession involves two consecutive quarters of negative growth, though the official determination is made by the National Bureau of Economic Research, often retroactively.
Economists at JPMorgan have revised their first-quarter growth projection downward from 2.25% to 1.5%. They anticipate that while economic activity was weak in January, a rebound in February and March could offset some of the decline.
“For now, we are not inclined to hit the panic button,” JPMorgan economists said on Friday, pointing out that labor market data does not currently align with an economy in decline.
The U.S. Labor Department is set to release weekly jobless claims data on Thursday, followed by the February employment report on Friday.
Apollo Management Chief Economist Torsten Slok commented in a note on Saturday that the U.S. economy is likely to experience a “modest stagflationary shock” but should avoid a recession.
“In other words, DOGE and tariffs combined are a mild temporary shock to the economy that will put modest upward pressure on inflation and modest downward pressure on GDP,” Slok wrote.
