U.S Economy: Surprise GDP Drop Sparks Recession Fears as Inflation Stays Hot

The U.S. economy stumbled at the start of 2025, logging a 0.3% annualized decline in GDP—marking a sharp contrast to late 2024’s growth.

This early estimate from the Commerce Department suggests momentum is fading, despite resilient consumer demand.

Beneath the surface, private sector activity remained solid, with real final sales rising 3%. But price pressures were also rising: consumer-related inflation gauges hovered around 3.5%, underscoring the persistent cost-of-living squeeze.

The contraction came largely from two fronts: a pullback in government outlays and a spike in imports, which drag on the GDP calculation. Although business investment and exports provided some lift, they weren’t enough to offset the drag.

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Worries over tariffs appear to have driven an early surge in imports, distorting the quarter’s figures. At the same time, public sector consumption fell sharply, adding to the weakness. Analysts caution that these trends could worsen in the second quarter, edging the economy closer to a recession.

Forecasts had pointed to slight growth, with expectations centered around 0.3% to 0.5%. Now, the narrative is shifting. Trading Economics revised its Q2 outlook to -1.2%, and Polymarket traders raised recession odds to 71%.

Markets didn’t take the news lightly. Bitcoin slipped, gold inched higher, and U.S. equities dipped alongside rising bond yields. Meanwhile, leading GDP models painted conflicting pictures—ranging from a deep contraction to moderate growth—further clouding the economic outlook.

Alexander Stefanov