Economic Growth Slows in Q1 as Tariffs Weigh on Confidence, But Labor Market Holds Strong
Weekly Economic Review: May 2, 2025
Consumer confidence continued to decline in April, and businesses demanded fewer workers in March due to economic uncertainty; the economy contracted in Q1 despite healthy consumer spending driven by disposable income growth; inflation stagnated in March; and businesses added a higher-than-expected number of jobs in April, demonstrating a resilient labor market.
It was a busy week for economic data releases, beginning with reports of significantly weakening consumer confidence, driven by increased negative sentiments about the anticipated impact of tariffs on the economy and labor market. Consumers’ short-term outlook on income, business, and labor market conditions also dropped significantly, A measure of present conditions also declined, indicating widespread pessimism about the future. Expectations regarding personal financial situations worsened, with future income expectations turning negative for the first time in five years.
Job openings dropped significantly In March, to their lowest level since September. This led to a decrease in the ratio of job openings to unemployed individuals, which was also the lowest since September. Layoffs fell to their lowest level since June, while the number of people quitting their jobs rose to their highest total since July. Meanwhile, the number of hires saw only a slight in-crease, as businesses remained cautious about expanding their workforce amid economic uncertainty.
The initial estimate for first-quarter gross domestic product (GDP) indicated a 0.3% contraction in economic growth, coming in lower than expected and marking the first decline since the first quarter of 2022. This downturn was mainly due to a significant surge in imports (which are subtracted in the GDP calculation), likely driven by businesses stocking up on goods prior to the implementation of tariffs. The surge in imports also resulted in a substantial trade deficit.
Consumer spending showed growth, although slowing significantly from the prior quarter, marking the lowest increase since the second quarter of 2023. However, this growth remains resilient, driven by spending on both goods and services. Adjusted for inflation, real consumer spending reached its highest level since January 2023. The growth in consumer spending likely reflected higher personal income, which exceeded expectations in March but was lower than the previous month’s figure. Despite the increase in personal income, consumers saved less, leading to a lower personal saving rate in March.
Both monthly headline and Core Personal Consumption Expenditure (PCE) inflation measures remained unchanged in March compared to the previous month, marking the first time since May 2024 that this occurred. These figures were lower than expected.
Businesses created significantly more jobs than anticipated in April, primarily driven by growth in the health care, transportation and warehousing, financial activities, and social assistance sectors. Transportation and warehousing employment saw its largest increase since December, mainly due to heightened activities resulting from the surge in imports. Meanwhile, federal government employment continued to decline over the past three months, due to efforts to downsize the federal workforce. Despite news headlines of significant layoffs, the modest decline in federal government employment mainly reflected those on paid leave or receiving pay and benefits through the deferred resignation program (DRP) being counted as employed, as well as some being reinstated by courts. The market expects a significant decline in federal workforce numbers when the DRP ends in September.
The unemployment rate remained steady, while the participation rate (the proportion of the population working or seeking work) increased slightly in April,
Let’s examine in more detail the Conference Board’s Consumer Confidence Index and survey results, the Job Openings and Labor Turnover Survey (JOLTS), GDP, the PCE price index, person-al income and personal spending and the job creation and employment situation data announced last week.
Consumer Confidence:The Conference Board reported that its Consumer Confidence Index, which gauges consumers’ views and expectations regarding business conditions, income, and the labor market, fell by 7.9 points in April to 86.0, lower than anticipated and its lowest point in nearly five years, This decline was widespread across all age groups and most income brackets, particularly among consumers aged 35 to 55 and those earning over $125,000 annually.
Short-term expectations for income, business, and labor market conditions, as measured by the Expectations Index, dropped significantly by 12.5 points to 55.4 and reached their lowest level since October 2011. The April figure is well below the recession-indicating threshold of 80. The proportion of consumers expecting fewer jobs in the next six months reached its highest level since April 2009, during the Great Recession. Future income expectations turned negative for the first time in five years, reflecting growing concerns about personal financial situations.
Perceptions of the current labor market weakened, with the labor market differential (views on whether jobs are plentiful or hard to get – a key metric for assessing labor market strength) de-creasing to 15.1 from 17.5 in February. A higher share of consumers now expects a stock market decline over the next 12 months, the largest since October 2011, with an average anticipated de-cline of 7%, the highest since November 2022. Concerns about the impact of tariffs have reached an all-time high, and the negative effects of these concerns on the economy are also rising.
Consumers’ assessments of their family’s future financial situation have significantly weakened, and the share of consumers expecting a recession in the next 12 months has increased to a two-year high. Plans for purchasing homes, cars, and vacations have decreased, along with plans for big-ticket items like appliances and electronics. Consumers also intend to reduce spending on services, affecting nearly all service categories.
JOLTS:The Bureau of Labor Statistics (BLS) reported a decrease of 288,000 job openings in March, bring-ing the total to 7.19 million, down from a revised 7.48 million (initially 7.57 million) in February. The lower job openings likely reflect weaker labor demand due to economic uncertainty. This figure fell short of the market expectation of 7.50 million. Year-over-year, job openings declined by 901,000. The monthly drop was widespread, with significant losses in transportation, warehousing, and utilities (59,000), accommodation and food services (42,000), real estate and rental and leasing (39,000), construction (38,000), health care and social assistance (37,000), federal government (36,000), and state and local government (24,000). All four regions experienced declines in job openings.
The ratio of job openings to unemployed individuals, a key metric monitored by the Fed to gauge the balance between labor demand and supply. decreased to 1.0 in March from 1.1 in February. Meanwhile, the number of hires rose by 41,000 to 5.41 million in March, up from 5.37 million in February. The increase in hires was primarily driven by gains in accommodation and food services (50,000), health care and social assistance (31,000), and finance and insurance (24,000), which were partially offset by losses in construction (45,000), professional and business services (43,000), and wholesale trade (13,000). The South was the only region to post a decline in hires in March. On an annual basis, hires decreased by 61,000.
Layoffs dropped by 222,000 to 1.56 million in March, following an increase of 106,000 to 1.78 mil-lion (revised down from 1.79 million) in February, which was below the market expectation of 1.81 million. Layoffs increased by 109,000 over the year. The monthly decrease in layoffs was broad-based, driven by reductions in accommodation and food services (77,000), retail trade (66,000), health care and social assistance (34,000), and professional and business services (32,000). The Northeast, South, and Midwest saw decreases in layoffs, while the West experienced a slight in-crease.
The number of voluntary resignations rose by 82,000 to 3.33 million in March, after a decrease of 6,000 in February to 3.25 million (revised up from 3.19 million). The March figure exceeded the market expectation of 3.19 million. Year-over-year, quits increased slightly by 3,000. The quits rate, which measures the rate at which workers voluntarily leave their jobs, excluding retirements, increased to 2.1 in March from 2.0 in February.
Q1 2025 GDP (Initial Release):According to the initial estimate from the Bureau of Economic Analysis (BEA), the economy con-tracted by 0.3% in the first quarter, a significant drop from the 2.4% growth in the previous quarter and lower than the market expectation of a 0.3% increase. This decrease was primarily driven by a 41.3% surge in imports (which subtracts from GDP) and a 1.4% reduction in government spend-ing. These negative factors were partially offset by a 1.8% increase in consumer spending, a 21.9% rise in investment, and a 1.8% boost in exports.
In terms of contributions to the GDP percentage change, consumer spending and private investment added 1.21% and 3.60%, respectively. Conversely, government spending and investment, along with net exports, contributed -0.25% and -4.83%, respectively. The net exports figure includes a 0.19% increase in exports, which was more than offset by a -5.03% increase in imports.
Consumer spending in the first quarter slowed significantly from 4% in the previous quarter, mark-ing the smallest gain since mid-2023. Despite this slowdown, consumer spending is still considered healthy. The decline in government spending and investment was mainly due to a 5.1% drop in federal spending, which resulted from significant funding cuts and layoffs of federal workers under the Trump administration. Imports saw the largest increase since the third quarter of 2020. Busi-nesses substantially expanded their inventories and investment in information processing and transportation.
Final sales to private domestic purchasers, a key indicator of economic activity that excludes in-ventories, trade, government spending, and other volatile categories, increased by 3.0%, up from 2.9% in the fourth quarter. This index, which measures private demand in the economy, represents the sum of consumer spending and private investment.
PCE Price Index & Personal Income and Outlays:The BEA reported the latest statistics on the PCE price index, personal income, and personal spending:
PCE Price Index:For March, the headline PCE price index was unchanged, aligning with expectations and down from 0.4% (revised up from 0.3%) in February. On an annual basis, headline PCE inflation in-creased by 2.3%, which is lower than February’s 2.7% (revised up from 2.5%) but higher than the market expectation of 2.2%. The monthly decrease was primarily due to a 0.5% decline in goods prices. Food prices rose by 0.5%, while energy prices fell by 2.7% month-over-month in March.
The Core PCE index, which excludes food and energy prices and is the Federal Reserve’s preferred inflation measure, was unchanged in March. This was lower than February’s 0.5% increase (revised up from 0.4%) and the market expectation of 0.1%. Year-over-year, the Core PCE in-creased by 2.6% in March, matching market expectations and lower than the revised February figure of 3.0% (up from 2.8%).
Personal Income:Personal income rose by 0.5% in March, surpassing the market expectation of 0.4% but lower than the previous month’s revised figure of 0.7% (down from 0.8%). The growth in March was broad-based, primarily driven by wages, salaries, and proprietors’ income. The rise in proprietors’ income was largely due to farm proprietors’ income, reflecting payments from the Emergency Commodity Assistance Program under the American Relief Act.
Disposable income, a key factor in consumer spending, showed meaningful growth following strong growth in February, increasing by 0.5% following a 0.8% rise in February. Similarly, real disposable income (adjusted for inflation) posted its strongest advance since January 2024. Real disposable income grew by 0.5% in March, up from 0.4% in the previous month. Personal savings amounted to $872 billion in February, with the personal saving rate (savings as a percentage of disposable income) decreasing to 3.9% from 4.1% in February.
Personal Spending:Personal spending, or consumer spending, increased by 0.7% in March, following a 0.5% rise (revised up from 0.4%) in February. The March figure slightly exceeded the market expectation of 0.6% and was primarily driven by higher spending on both goods (0.9%) and services (0.6%). Within goods, the largest contributors were motor vehicles and parts, recreational goods and vehicles, and other nondurable goods. In the services category, the main contributors were food services & accommodations, housing & utilities, and health care.
Job Creation and Employment Situation:The BLS reported that businesses added 177,000 new jobs in April, following 185,000 jobs created in March (revised down from 228,000). April’s job growth came in higher than the anticipated 138,000 due mainly to contributions from health care (51,000), transportation and warehousing (29,000), financial activities (14,000), and social assistance (8,000). Federal government employment decreased by 9,000 in April, contributing to a total decline of 26,000 jobs since January.
March’s job creation figure was revised down by 43,000. Similarly, February’s figure was revised down by 15,000, from 117,000 to 102,000. Combined, the revisions for March and February are 58,000 jobs lower than previously reported. Consequently, the three-month average of monthly job growth, which helps smooth out monthly fluctuations, increased to 155,000 in April from 133,000 in March.
The unemployment rate remained steady at 4.2% in April, as expected. The number of job losers (or layoffs) increased by 140,000 to 3.45 million, driven mainly by increases of 54,000 in temporary layoffs and 85,000 in permanent layoffs. Additionally, the number of job leavers – unemployed individuals who voluntarily quit their jobs to seek new employment elsewhere – decreased by 15,000 to 855,000 in April, following a decrease of 48,000 to 870,000 in March. The declines in job leavers reflect perceptions of increased difficulty in finding a new job. Employment in temporary help services, a leading labor market indicator, stood at 2.54 million in April, slightly increasing by 3,600 after a downward trend from December to March.
The labor-force participation rate, which measures the percentage of working-age people who are employed or actively seeking work, improved to 62.6% in April from 62.5% in March, exceeding market expectations of 62.5%. The prime-age participation rate (the rate for those between the ages of 25 and 54) reached its highest level in seven months. The number of people working part-time for economic reasons – those who would prefer full-time employment but are working part-time due to reduced hours or inability to find full-time jobs – decreased by 90,000 to 4.69 million in April, following a decrease of 157,000 in March. The multiple jobholders as a percentage of total employed decreased by 76,000 to 5.4% (8.86 million) in April from 5.5% (8.94 million) in March.
Wage growth, measured by average hourly earnings, rose by 0.2% in April after a 0.3% increase in March, which came in lower than expected. On an annual basis, wages grew by 3.8%, consistent with March but below the market’s expectation of 3.9%. Average weekly hours for all employees remained unchanged at 34.3 hours in April, slightly higher than the market expectation of 34.2 hours.
On a concluding note,the job creation and employment situation report published on Friday highlighted the resilience of the labor market, alleviating fears of a recession following the significant contraction of GDP in the first quarter. The survey reference period for the BLS’s employment data is centered around April 12th, as its establishment survey includes the pay period containing April 12th, and its household survey uses the calendar week that includes the 12th of the month. Therefore, it is still too early for the labor market and economic activity to reflect the impact of the Trump administration’s tariff policy. The market is likely to gain more clarity on the economy’s trajectory after the 90-day pause (which went into effect on April 10, 2025) on reciprocal tariffs (excluding China), which ends on July 9, 2025, and the outcome of trade negotiations with China.
The U.S. stock markets experienced positive gains this week, with all major indexes posting in-creases. These gains were primarily driven by strong earnings from major technology companies, better-than-expected job numbers, progress in trade discussions, and signs of potential trade talks between China and the U.S. The S&P 500 rose by 2.9% this week, reducing its year-to-date de-cline to 3.31%, and marking its longest streak of daily gains since 2004, fully recovering from the significant decline in early April. Similarly, the Nasdaq increased by 3.4% this week, bringing its year-to-date decrease to 6.9%.
Treasury yields increased slightly this week. The two-year, five-year, and ten-year Treasury yields ended at 3.83%, 3.92%, and 4.33%, respectively, rising by 9, 4, and 4 basis points com-pared to their levels a week ago. The most noticeable change occurred on Friday, with yields post-ing a meaningful rise across most maturities. This was primarily due to the stronger-than-expected jobs report and the market’s expectations of potentially fewer rate cuts by the Federal Reserve.
The Fed will hold its next FOMC meeting from May 6 to May 7. Fed Chair Powell has repeatedly indicated that they are in no hurry to cut rates until there is further clarity on the tariff’s impact on the economy and employment. Consequently, the market expects no rate cut at the May meeting.
On the rate cut expectation front, similar to last week, the market projects a 50% chance of one 0.25% rate cut and a 100% chance of three 0.25% cuts in 2025, totaling 0.75%. The first 0.25% cut is expected at the June FOMC meeting with a 60% probability, which is considered a 50/50 chance. However, the market now anticipates two 0.25% cuts (totaling 0.5%) by September, which was previously expected by July, followed by a third cut in October, and potentially a fourth cut in December with a 50/50 chance.
Mark Yoon, CFA CPA
EVP & CFO of Commercial Bank of California
Thomas McCullough
EVP of Commercial Bank of California
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