GDP Q1 2025: Consumer Spending’s Not Enough to Help Avoid Economy’s Contraction

Consumer spending, the chief engine of economic growth, was not enough to stop an overall pullback in U.S. gross domestic product (GDP). And with evidence of a slowing gains in disposable income, consumers’ appetite to keep spending look set to be tested.

The Bureau of Economic Analysis on Wednesday (April 30) released its advance estimate for Q1 2025, showing that real GDP declined at an annual rate of 0.3%, marking the first negative showing in three years. This represents a significant slowdown from the 2.4% growth reported in Q4 2024 and brings a halt to the positive momentum seen in the second half of last year.

The decline in GDP was primarily driven by a sharp increase in imports (which subtract from GDP) and a decline in government spending, particularly at the federal level due to lower defense expenditures. These effects were only partially offset by increases in private investment, consumer spending and exports.

One encouraging sign came from final sales to private domestic purchasers, which rose by 3.0% in Q1, up slightly from 2.9% in Q4, indicating some resilience in core private sector demand.

Inflation’s Gains

Inflation is still a fact of life, as the gross domestic purchases price index rose by 3.4%, up from 2.2% in Q4. The personal consumption expenditures (PCE) price index climbed 3.6% overall.

In the first quarter of 2025, consumer spending on services continued to drive overall demand, led by increases in healthcare and housing and utilities. Within goods, nondurable goods spending decreased modestly, especially in categories like gasoline and other energy goods. In contrast, durable goods saw a big decline, particularly in big-ticket items like motor vehicles, which pulled the overall goods category down considerably (from 1.30% in Q4 to 0.11% in Q1). This divergence suggests that while consumers are still spending on essentials and services, they may be pulling back on more discretionary or long-term purchases.

Personal Income Pressures

In a separate BEA report on Wednesday, personal income increased 0.5% compared to March, a slowdown from the 0.7% monthly increase pace recorded in February and January. On an annual basis, personal income increased 4.3% in March, slightly down from the 4.5% increase recorded in February, marking the second lowest annual increase (after the 4.2% recorded in January 2025) since April 2022.

Personal consumption expenditures (PCE) grew by $134.5 billion, or 0.7 percent in nominal terms. Real PCE followed the same trend as it increased 0.7% as well.  Spending on goods increased 0.9%, or $54.5 billion. Meanwhile spending on services rose by 0.6%, or $79.9. March increments surpass the levels recorded in February where they increased 0.7% and 0.6% respectively.

There’s evidence that a March surge ahead of tariffs may be unsustainable. The largest growth in March was seen in spending on motor vehicles and parts, which rose by $56.6 billion.

In March, personal outlays — which include PCE, interest payments, and current transfer payments — rose by $136.6 billion.

The savings rate has been uneven, and in March was 3.9% of disposable personal income, where that percentage has been 4.1% in February and 3.9% in January. Interest payments, which includes the payments made on credit card and other debt, inched higher in March to $561 billion, up from $557 billion in January.

The pressures to pad savings, grapple with price increases and satisfy debt payments all may converge on spending. As PYMNTS Intelligence has found, 78% of consumers say they’ll cut back by buying less or buying cheaper. Karen Webster has noted that a 2% reduction in spending across this group would remove nearly $100 billion from the economic growth engine, which, as the first quarter GDP data show, is not firing on all cylinders, at least for the moment.