Atlanta Fed Signals Negative GDP Growth in Early 2025

Initial economic reports for the start of 2025 suggest a downturn in growth, as indicated by a measure from the Federal Reserve Bank of Atlanta.

The GDPNow model, which tracks incoming economic indicators, currently forecasts a 1.5% contraction in the GDP for the period from January to March, based on an update shared on Friday morning.

The revised figures are based on weaker-than-anticipated consumer spending during January's harsh weather and a drop in export levels, leading to the adjusted forecast. Before this update, GDPNow expected a 2.3% growth for the quarter.

Forecast Adjustments and Economic Indicators

Although the GDPNow model is typically variable and solidifies as the quarter progresses, its current estimates match some signs of an economic slowdown visible in other analyses.

Reflecting on the data, Mohamed El-Erian, a principal economic advisor at Allianz, remarked on social media, noting the sobering reality despite the volatility characteristic of such high-frequency forecasts by the Atlanta Fed.

In early February, the indicator suggested GDP could grow by as much as 3.9%, but this figure has been revised downward as more data becomes available.

Consumer Spending and Exports Impact

On the recent Friday, data indicated that personal consumption expenses decreased by 0.2% in January, contrary to the Dow Jones' expected 0.1% rise. When adjusted for inflation, this spending actually fell by 0.5%. Consequently, this reduction shaved a whole percentage point from GDP expectations, lowering the forecast to 1.3%.

Simultaneously, the contribution from net exports plummeted from a negative 0.41 percentage points to a stark negative 3.7 percentage points.

Inflation Concerns and Labor Market Trends

This collection of data, which impacts growth projections, also ties into concerns over inflating costs. The Commerce Department’s reports also indicate a lower inflating marker favored by the Fed, as the core personal consumption expenditures price index dropped to 2.6%, down 0.3% from the previous month.

In the same week, news from the labor market showed an uptick in data that returned to levels not seen since early October.

Market Reactions and Economic Outlook

Additionally, bond market trends have begun reflecting expectations of slower economic growth with the three-month Treasury yield surpassing that of the 10-year note, a potential indicator of looming recession within the next year or so.

This mix of economic uncertainty has set a rough stage for the start of the year. Despite this volatility, the Dow Jones Industrial Average shows a 2% rise in 2025 amid fluctuating market conditions.

Joseph Brusuelas, the chief economist at RSM, suggests that a complacent attitude in asset markets may soon be disrupted by these developments.

Investors are increasingly confident that the Federal Reserve will react to these economic indicators by cutting interest rates multiple times this year. By Friday afternoon, futures traders were pricing in an 80% chance of a quarter-point rate cut in June, with potential for three more by year’s end.