What to Make of Weaker First Quarter Growth?

Last week, incoming data showed that the U.S. economy shrank in the first quarter of 2025, the first time in several years we’ve seen this happen.

Now, it’s essential to note that one quarter of decline doesn’t mean a recession is inevitable. But with today’s unpredictable economic policies, it’s fair to wonder if this could be the beginning of a short-term slowdown.

Why Predicting the Economy Is Harder Than Ever

Indeed, trying to figure out where the U.S. economy is going has never been easy. But in the years since the pandemic, it’s become even more difficult.

That’s because many of the tools economists used to rely on don’t seem to work as well anymore. For example, when interest rates rise, that usually signals a slowdown or even a recession in the making.

But in the past five years, even with warning signs in place, Americans kept spending. And since consumer spending makes up over two-thirds of the U.S. economy, this has helped keep things growing.

So, what’s changed?

Well, what’s likely different this time around is the policy environment. We’re dealing with a new set of economic rules and decisions that make predictions more complicated.

And these changing policies create more uncertainty, and that can weigh on both consumers and businesses. Because of this, the chances of a recession, or at least slower growth, may be rising as these policy effects ripple through the economy.

What Caused the First-Quarter Economic Decline?

So then, to better understand what’s behind the recent slowdown, we need to look at the key parts of economic growth.

And as you’ll likely recall from your economics courses in college, gross domestic product (GDP) is made of: 1) government spending, 2) business investment, 3) household spending, and 4) net exports (exports minus imports).

So, what did the data show us?

Well, in the first quarter, two things stood out as the leading causes of weaker growth: a drop in government spending and a sharp increase in imports.

Now, the rise in imports likely happened because of the Trade War, as businesses and consumers were trying to buy goods before prices increased.

To be sure, as trade tensions have returned, and tariffs on some items are now as high as 150%, that’s led many to act early, stocking up before things get worse.

Now, the drop in government spending is more complicated.

That’s because overall federal spending is still higher than in past years, but when adjusted for inflation and measured quarter by quarter, it appeared to fall. That technical dip was enough to drag down total economic output.

What the Numbers Don’t Tell Us

While hard data like GDP shows us what already happened, it’s also essential to pay attention to soft data, like how people and businesses are feeling about the future. This kind of information can help predict what’s coming next.

And lately, people haven’t been feeling very confident. For example, a recent University of Michigan survey showed consumer confidence hit its lowest point in two years. A lot of that concern comes from worries about inflation and what future policies might bring.

We’re also seeing changes in the job market. That’s because data are showing there are fewer job openings, and layoffs are becoming more common. These are signs that employers are starting to pull back, something that often happens toward the end of an economic cycle.

And adding insult to injury, even shipping activity has slowed. At major ports on the West Coast, freight volumes have dropped, showing that businesses may be holding off on orders as they wait to see how trade issues unfold. All of this points to a more cautious mood taking hold across the economy.

The New Trade War: What’s Changed?

Another factor adding pressure to the economic outlook is the return of Trump’s Trade Wars.

But this time, businesses are handling the tariffs in a much different way than they had during Trump’s first administration.

That’s because, during the first trade war in 2018, many businesses chose to absorb tariff costs to keep their customers. But now, more of them are passing those costs directly to shoppers.

That makes everything more expensive, and if prices keep going up, people may start spending less. If trade problems continue, and if businesses and consumers respond by cutting back, it could create a chain reaction that leads to even slower growth.

So, Are We Heading for a Recession?

Nevertheless, it’s too soon to say for sure whether we’re heading for recession. Frankly, one quarter of economic decline is not enough to call for a slowdown, particularly when the factors could be temporary.

Indeed, even experienced economists often struggle to predict when a recession will hit.

But one thing is clear: today’s policy environment isn’t helping. And ongoing uncertainty about trade, inflation, and regulation has made people and companies more cautious about spending and investing.

If that uncertainty doesn’t clear up soon, the risk of economic weakness and higher prices will likely grow.

In times like these, it’s easy to get distracted by scary headlines or market swings. But this is precisely why having a strong financial plan matters.

When things feel shaky, your plan should be your guide.

Now is not the time to make big changes out of fear. Instead, lean on the thought and strategy that went into your long-term plan.

That kind of discipline is what helps you stay on track, especially when the road ahead feels uncertain.