After a noisy start to 2025 — with market swings, tariff headlines, and political uncertainty — it’s no surprise that recession fears are making a comeback. The recent dip in GDP has raised eyebrows, but before we jump to conclusions, it’s important to take a closer look at what the numbers really say.
What the GDP Drop Actually Means
Real GDP contracted at a -0.3% annual rate in Q1 2025, the first decline since 2022. This headline number doesn’t tell the full story. The biggest drag came from international trade — specifically a surge in imports as businesses and consumers rushed to buy goods before higher tariffs took effect. Since GDP only measures domestic production, imports are counted as a subtraction — even though Americans were actively spending.
In reality, core components of the economy are still showing strength. Consumer spending rose at a 1.8% pace, and business investment in equipment jumped at a robust 22.5% annual rate. We often focus on what’s called “core GDP” — which includes consumer spending, business investment, and homebuilding while excluding the more volatile components like inventories and trade. That figure grew at 3.0% in Q1, in line with its pace over the last year.
Job Market Still Strong
Employment data continues to show resilience. The economy added 177,000 jobs last month, and job growth is averaging 144,000 per month so far this year. What’s notable is that recent job gains are coming more from private-sector industries, rather than government or government-funded sectors like health and education, which dominated payroll growth in 2023–2024.
Industrial activity backs this up: industrial production and manufacturing both expanded at annual rates over 5% in Q1 — hardly the stuff of recession.
Is This 2022 All Over Again?
We’ve seen this before. In early 2022, a similar GDP dip triggered recession chatter, but the contraction was driven by temporary factors — just like now. Jobs and industrial activity kept climbing, and the broader economy avoided a downturn.Still, just because we’re not in a recession now doesn’t mean we’re out of the woods.
Recession Risk: Elevated, but Not Inevitable
The probability of a recession starting in the next 12 months is around 40–50%, higher than average. Why? Because the full effects of tighter monetary policy in 2022–2023 still haven’t fully worked their way through the system. Money supply has declined, interest rates are higher, and those shifts tend to take time before showing up in the real economy.
Meanwhile, fiscal policy is tightening. After two years of large budget deficits (around 6–6.5% of GDP), federal spending is starting to pull back. This could expose some of the economic weakness that was masked by government stimulus. For example, the Trump administration recently proposed a sharp cut in non-defense discretionary spending — 32% below what the Congressional Budget Office had forecast earlier this year.
While this shift may create more room for private sector activity in the long run, it could also bring short-term pain for industries that rely on federal funding.
Tariffs Add Another Layer of Uncertainty
Businesses are also wary of how trade policy will evolve. The recent spike in imports ahead of tariff hikes may not be repeated if companies remain uncertain about timing and duration. That hesitation can weigh on investment and hiring decisions, slowing growth even if the fundamentals remain sound.
Final Thoughts
Despite the GDP headline, the underlying data doesn’t support the idea that we’re already in a recession. Risks are clearly rising. Between lagged effects from tighter monetary policy, a pullback in federal spending, and growing trade tensions, there are plenty of headwinds on the horizon.
For now, the economy is still moving forward — but investors would be wise to keep a close eye on what’s next.