Economic Outlook - May 2025
- The Commerce Department reported that real gross domestic product (GDP) decreased at an annualized rate of 0.3% in the first quarter of 2025. This initial reading was slightly below expectations and represents a decline from the 2.4% growth in the fourth quarter of 2024. While this was the first contraction since the first three months of 2022, it was primarily driven by a significant increase in imports, which are a subtraction in the calculation of GDP. Imports soared as wholesalers and retailers rushed to front-run the Trump administration’s tariffs. Net exports, the difference between what the U.S. imports and exports, subtracted nearly 5% from headline GDP. These factors were partially offset by the strength in consumer spending and business investment. For the full year 2025, we anticipate real GDP growth in the range of 1.5% – 2.0%.
- On April 2, dubbed “Liberation Day,” President Trump laid out his plan for 10% tariffs on imports from all countries. He also levied additional duties, called reciprocal tariffs, on what the White House termed the “worst offenders.” Universal 10% tariffs went into effect on April 5, and reciprocal tariffs were to begin on April 9. The president altered this plan before reciprocal tariffs were implemented, declaring a ninety-day pause. The 10% tariff rate was maintained on nearly all nations. The prime exception was China, where Trump increased the tariffs to 125%, citing China’s disrespect for world markets. While it appears the 10% tariffs will remain in place, it will be important to develop the framework for new trade deals, because a global trade war benefits no one.
- The labor market remains resilient in the face of much uncertainty. The U.S. Bureau of Labor Statistics announced that nonfarm payrolls increased by 177,000 in April, exceeding the 135,000 estimate. The unemployment rate of 4.2% remained unchanged from March and wage growth, as determined by average hourly earnings, held steady at 3.8%. With consumer spending accounting for close to 70% of the U.S. economy, a strong labor market and low unemployment are key components for economic growth.
- Inflation moderated in the month of March. The core personal consumption expenditures index, the Federal Reserve’s preferred inflation measure, rose 2.6% year-over-year in March, the lowest level since June 2024. This measure, which excludes the more volatile food and energy costs, was a welcome slowdown from the 3.0% pace in February. A stable labor market, healthy consumer spending, and softening inflation will be encouraging signs for the Federal Reserve which next meets on May 6–7. We expect the Federal Open Market Committee to leave the federal funds rate unchanged at a range of 4.25% to 4.50% at their May meeting and reassess at their next meeting on June 17-18.
Sources: FactSet, Dow Jones Publishing, Bloomberg, Bureau of Labor Statistics, U.S. Federal Reserve, Yardeni Research, Wall Street Journal, Bureau of Economic Analysis
Disclosure: This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
For more information, call 617-557-9800, or email info@welchforbes.com.