The US Economy Just Shrank for the First Time in 3 Years: What That Means for Your Wallet
Written by
John Csiszar
Edited by
Zuri Anderson
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The Q1 2025 GDP results are in, and the results were not exactly encouraging. While in a typical quarter the U.S. GDP grows by 2% to 4%, in Q1 2025, the economy actually shrank.
Considering that two consecutive quarters of negative GDP growth typically constitute a recession — and the fact that many economists have been predicting a recession in 2025 — investors are unsurprisingly on edge.
But what exactly does a shrinking GDP mean for the economy and your wallet? And was this reading the start of a trend or simply a one-off reading? Read on to learn all the details.
Q1 2025 GDP Reading
The economy shrank by 0.3% in the first quarter of 2025, marking the first contraction since Q1 2022. This was a stark contrast to the 2.4% rate of growth in Q4 2024.
Although economists were expecting a negative reading, estimates were for a drop of 0.2%, slightly better than the negative 0.3% that was reported.
What a Recession Could Mean for Your Wallet
It’s often said that economists can’t identify a recession until it has already passed. If the Q1 2025 GDP reading is the first of two in a row, which would meet the traditional definition of a recession, it would mean that the country is likely already in a recession.
The economic slowdown that defines a recession can hit your wallet in various ways.
Recessions usually result in layoffs and job losses, so your income may be at risk. Debt levels tend to rise during a recession, and this would be a likely consequence if you lose your job and don’t have an adequate emergency fund.
Investment values also tend to fall during a recession, meaning your retirement account or other investments may take a hit.
Reasons Why the Q1 Reading May Be a Quirk
The drop in first-quarter GDP and the potential for the economy to fall into a recession fit neatly into the narrative that the Trump administration’s tariffs were destined to drag down the economy. But that may not necessarily be the case.
According to Gus Faucher, chief economist at PNC Financial Services Group, trade did play a role in the first-quarter GDP drop, but perhaps not in the way that you might imagine. As Faucher sees it, “We saw companies bringing in a lot of imports to try to get ahead of tariffs. We saw a huge build in inventories.”
This imbalance in imports — which were essentially “pulled ahead” into Q1 to avoid getting hit with tariffs — was the primary driver behind the drop in GDP.
Highly-regarded financial publication Barron’s notes that the 41% surge in Q1 imports “is likely to be a one-time event.” Meanwhile, the primary drivers of the economy, inflation-adjusted final sales to domestic purchasers and consumer spending, actually rose in the quarter, by 3% and 1.8%, respectively.
So Are We Out of the Woods?
While the Q1 decline in GDP may prove to be an anomaly, this doesn’t mean that there is no risk of the economy continuing its decline and falling into a full-blown recession.
Barron’s notes that Trump’s tariffs are a moving target, making it hard for companies to conduct business as usual amidst all the uncertainty. Additionally, Chinese imports have already plummeted, something that could cause severe economic ripples in the coming months. There is certainly a very possible scenario in which the economy continues to contract as the trade war continues.
The Bottom Line
While a recession is not guaranteed, and certain data points suggest the economy remains strong, it’s never a bad idea to review your financial position and see if you are prepared to weather an economic contraction.
An emergency fund that can cover three to six months of your living expenses is a good start. Paying down debt, living within your means and doing your best to prove your value at work are all additional ways to help defend against the effects of a recession.
Editor’s note on political coverage: GOBankingRates is nonpartisan and strives to cover all aspects of the economy objectively and present balanced reports on politically focused finance stories. You can find more coverage of this topic on GOBankingRates.com.
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