Economy at Risk: GDPNow Forecasts First Contraction Since 2022

By Doug Young – 12 March 2025

Introduction

The U.S. economy is facing growing concerns as GDPNow has revised its forecast for the first quarter of 2025.

GDPNow, a model developed by the Federal Reserve Bank of Atlanta, is renowned for its real-time estimates of economic growth. Its recent sharp downward revision for the first quarter’s real GDP growth has sent shockwaves through the financial world.

This revision predicts a potential contraction of 1.5%, marking the first economic downturn since early 2022. While GDPNow’s forecast is not an official government estimate, it is widely respected and continuously adjusted as new economic data emerges.

The sudden shift has raised alarm bells among economists and experts, indicating that the battle against inflation may be slipping away.

Factors Contributing to the Revised Forecast

One of the major contributors to this downward revision is the collapse in consumer spending. Recent data revealed a significant decline of 0.5% in January, marking the largest drop in three years. Analysts had anticipated a slight increase, making this unexpected decline a serious miss.

Furthermore, net exports have also played a role in dragging down GDPNow’s growth estimate. The plunge in exports has resulted in a staggering reduction of 3.7 percentage points.

Inverted Yield Curve and Consumer Sentiment as Additional Warning Signs

As if the sharp downward revision by GDPNow wasn’t concerning enough, additional warning signs are emerging.

An inverted yield curve, a classic indicator of an impending economic downturn, has made an appearance. The yield on 10-year treasuries dropped below the 3-year note, a pattern that has historically preceded every U.S. recession since the 1970s. While an inverted yield curve does not guarantee a recession, its presence has heightened concerns among investors.

Adding to these worries is the decline in consumer sentiment. The University of Michigan’s consumer sentiment index fell nearly 10% in February, hitting a 15-month low.

Simultaneously, the Conference Board’s consumer confidence index experienced its worst monthly decline in over three years, dropping nearly 7%. Within the report, the expectations index, a key indicator, fell nearly 10 points, historically signaling a forthcoming recession.

Rising Inflation Expectations and Wall Street’s Complacency

Amidst these warning signs, inflation expectations have also spiked, posing further challenges for the economy. Expectations rose from 3.3% to 4.3%, a trend that the Federal Reserve would prefer to see reversed. Concerns are mounting that higher inflation could erode purchasing power and hinder economic recovery.

Despite these warning signs, some experts believe that Wall Street had, prior to the falls in the past week, been showing complacency.

Chartered financial analyst Cam Hui bluntly states that investors should be prepared for anything, highlighting the need to take these risks seriously.

Joseph Brusuelas, Chief U.S. Economist at RSM, echoes this sentiment, emphasizing that the complacency in asset markets is about to be disrupted.

Conclusion and Outlook

The U.S. economy finds itself in a precarious position as GDP growth estimates plummet, consumer sentiment plunges, and inflation expectations rise. While these warning signs do not guarantee an economic downturn, they underscore the uncertain state of the economy.

As the situation evolves, experts stress the importance of staying vigilant and informed. The fate of the economy hangs in the balance, and it is crucial for individuals, businesses, and policymakers to understand the risks and be proactive in mitigating potential negative impacts.