WASHINGTON, D.C. — May 1, 2025 — The U.S. economy slowed in the first quarter. According to the Bureau of Economic Analysis’ advance estimate, real GDP growth declined by 0.3% on an annualized basis.
Imports—which subtract from GDP—increased sharply by 50.9%, as businesses front-loaded purchases from foreign suppliers in anticipation of potential tariff hikes. Government spending also declined by 1.4%—the first decrease since Q2 2022. At the federal level, spending fell by 5.1%, with defense and non-defense outlays dropping by 8.0% and 1.0%, respectively.
Consumers hold the key
Personal consumption expenditures (PCE) growth moderated to 1.8% in the first quarter. Durable goods consumption declined by 3.4%, reversing the 12.4% gain seen in the fourth quarter of last year. Nondurable goods consumption grew by 2.7%, slightly below the previous quarter’s 3.1% growth. Services consumption rose by 2.4%, down from 3.0% in the preceding quarter. Altogether, a combination of factors—including a prolonged high-interest-rate environment affecting durable goods and the wealth effects of equity market volatility—contributed to more cautious household spending. Whether this trend continues into the second quarter will largely depend on the labor market and inflation outlook. The first quarter ended with a 4.2% unemployment rate and a 2.4% headline CPI inflation rate in March. Real personal disposable income rose 1.7% year-over-year in March.
Output gap remains positive
While first-quarter GDP data supports expectations for moderate economic growth in 2025, it also suggests the economy is gradually reverting to its long-term growth trend. The U.S. output gap—the difference between real GDP and the Congressional Budget Office’s estimate of potential GDP, defined as the maximum sustainable output when resources are used at normal rates—has remained positive since the third quarter of 2021, indicating the economy has been operating above capacity. In Q1 2025, the output gap was 1.2% of potential GDP, down from 1.8% and 1.7% in the third and fourth quarters of last year, respectively.
Sectoral imbalance continued in the first quarter
Despite economic growth last year and in prior years, sectoral imbalances persisted. Finance and technology sectors expanded while manufacturing and housing sectors experienced interest-rate-driven slumps. Equipment investment rebounded sharply, rising by 69.2% after a 30.6% decline in the previous quarter. However, the gains were uneven. Investment in information processing equipment surged by 73.6%, driven by continued growth in the information technology sector. By contrast, investment in industrial equipment declined by 0.9%, marking a second consecutive quarterly drop and underscoring continued weakness in manufacturing activity.
Untapped domestic capacity
A portion of the first-quarter GDP downtick was due to a spike in imports, highlighting underutilized capacity in domestic manufacturing. At the end of the quarter, the U.S. manufacturing capacity utilization rate was 77.2%, while plastics and rubber products manufacturing operated at 71.0%. These figures reflect the ongoing weakness in manufacturing activity, which could benefit from stronger domestic demand. Not knowing whether imports went into consumption—unlikely, given the weaker change in personal consumption expenditures (PCE)—it is likely that imports will be reflected in the change in inventory. An increase in inventory typically increases GDP in the short term. If the rush to import goods—perhaps in anticipation of escalating tariff tensions—is driven by expected future demand, then it is a strong positive signal for the economy. However, if inventories rise because of weak sales, it signals slowing demand.
Looking ahead, the trajectory of the U.S. economy will hinge on evolving conditions in inflation, interest rates, and the labor market. While pockets of strength remain, particularly in technology investment, the slowdown in consumption and persistent sectoral imbalances point to a fragile path forward—one that will require careful navigation by both policymakers and businesses.
Posted: May 2, 2025
Source: Perc Pineda, PhD – Chief Economist, The Plastics Industry Association (PLASTICS)
