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A little more than two weeks ago, the Mortgage Bankers Association predicted the economy would contract slightly in the third quarter, but a government report Wednesday showed a slightly bigger drop happened in the first quarter.
The U.S. Bureau of Economic Analysis said gross domestic product fell from the fourth quarter to the first quarter at an annualized rate of 0.3%, following a fourth-quarter gain of 2.4%. The first-quarter drop marked the first quarter of economic contraction since a 1.0% drop in the first quarter of 2022.
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Curt Long, chief economist for America’s Credit Unions, said a major factor was slowing consumer spending. On top of that, businesses surged orders for imports to beat President Donald Trump’s promised tariffs, and the “domestic” part of GDP means imports are subtracted from the total.
“Imports increased 41% as businesses stocked up on inventory ahead of tariff increases,” Long said. “More troublingly, inflation accelerated, which combined with tariffs pushes the prospect for rate cuts further into the future.”
Economist Jing Fu with the National Association of Home Builders (NAHB) said the report “suggests that inflationary pressure persisted.” The GDP price index rose 3.4% for the first quarter, up from a 2.2% increase in the fourth quarter of 2024.
A separate BEA report Wednesday showed the Personal Consumption Expenditures Price (PCE) Index, a favored measure of the Fed, rose 3.6% in the first quarter, up from a 2.4% gain in the fourth quarter.
Jing Fu said consumer spending rose at an annual rate of 1.8% in the first quarter, the slowest pace in seven quarters.
NAHB and MBA economists had forecast a 0.2% gain in GDP in the first quarter. The MBA’s April 11 forecast also expected GDP to rise 0.4% in the second quarter and to fall 0.1% in the third quarter before starting to rise again in the fourth quarter.
MBA Chief Economist Mike Fratantoni said “both growth and inflation were headed in the wrong direction” in the first quarter.
“The data showed a slower 1.8% growth rate for consumer spending, with a reduction in spending on motor vehicles and parts compared to last quarter,“ Fratantoni said. “Households were getting more cautious with respect to larger purchases even in advance of the tariff announcements.”
Fratantoni said the biggest drag on growth came from the sharp rise in imports. “Clearly, businesses were rushing to get goods into the country and were willing to store them until they were needed for production.”
“The quandary facing the Federal Reserve is that while the trend in the data is clearly showing a slowing economy, it also renewed upward pressure on inflation,” Fratantoni said. “We expect that the Fed will hold rates steady at its meeting next week (May 6-7) and will indicate that it will continue to hold at this level until it becomes clear whether a recession or inflation is the bigger risk.”
Contact Jim DuPlessis at [email protected].
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Jim DuPlessis
Jim covers economic data trends emerging for credit unions, as well as branch news and dividends.
