U.S. Department of the Treasury

Introduction

Despite multiple winter storms in January creating a drag early in the quarter, February and March saw stronger performance, indicating that economic growth likely continued in the first quarter of 2025, albeit at a slower pace compared to the previous quarter.  Meanwhile, labor markets picked up strength at the end of the first quarter, recovering from storm-ridden January: as of March, private-sector employers added 325,000 jobs during the first two months of this Administration.  In addition, inflation reads for February and March were favorable owing to downward pressures from energy prices and core goods, as well as significantly slower inflation for key core consumer services.  On balance, economic data for the first quarter illustrated the U.S. economy is poised to continue growing while seeing inflation return to its pre-pandemic target.

Real Gross Domestic Product (GDP)

Official data on real GDP growth in the first quarter will not be available until after this week’s TBAC meeting.  According to the most recent publicly available survey (the Wall Street Journal survey published on April 12, 2025), the median forecast for first-quarter GDP growth is 0.4 percent at an annual rate, slowing from 2024 Q4’s 2.4 percent pace.  In the survey, estimates of forecasters at the 25th and 75th percentiles ranged from 0.1 percent to 1.0 percent.  This survey closed before April 9 when President Trump announced a 90-day pause in implementing reciprocal tariffs.  The Bureau of Economic Analysis will release its advance estimate of first-quarter GDP growth on Wednesday, April 30.

Labor Markets

Although aggregate labor market data have eased at the margins, the anticipated slowdown in hiring has been gradual, unemployment rates remain relatively stable, and the headline labor force participation rate (LFPR) stabilized in the first quarter (see Table 1 – Labor Market Indicators).

• Total payroll job growth slowed to an average 152,000 per month during the first quarter of 2025, after accelerating to an average 209,000 per month during last year’s final quarter.  Following outsized gains in the immediate aftermath of the pandemic, the pace of hiring has eased in recent years to mirror population growth and demographic changes, helping to keep unemployment rates stable.
• Over the past eleven months, monthly unemployment rates have fluctuated within a narrow range of 4.0 percent and 4.2 percent.  For the past two quarters, the unemployment rate has averaged 4.1 percent per month, a rate that is near estimates by the Congressional Budget Office of the non-cyclical unemployment rate—or the rate of unemployment that is consistent with stable inflation and excludes fluctuations in aggregate demand.  As of March 2025, the unemployment rate ticked up to 4.2 percent, remaining within the nearly yearlong range.
• Labor force participation was also relatively stable during the first quarter.  After easing to an average 62.5 percent during the fourth quarter, the overall LFPR remained at that level in the subsequent quarter, just a tick below the reading for the whole of 2024.  The LFPR among prime-age workers edged down 0.1 percentage points to 83.4 percent during the first quarter, after a four-fold decline in the previous quarter.  Even so, participation among this demographic remained relatively sturdy: March’s reading was 0.2 percentage points above the peak reached just before the pandemic and only 0.6 percentage points below the 23-year high realized last summer.  Among prime-age men, the LFPR was 89.1 percent in March, or 0.8 percentage points below the 15-year high reached in July 2024.  Meanwhile, participation among those aged 55 or older remains remarkably stable despite broader demographic trends: for the past five quarters, the quarterly average LFPR for this group has remained within a range of 38.2 percent and 38.5 percent and stood at 38.2 percent as of March 2025.
• Other measures of labor demand, which had shown a declining trend in previous quarters, also stabilized in the first quarter.  At the end of last September, job openings were at 7.1 million, the lowest level since December 2020; however, average monthly job openings stood at 7.7 million during the first two months of 2025, matching the fourth quarter’s monthly average.  The ratio of job openings (or vacancies) per unemployed worker increased slightly to an average 1.1 in the final quarter of 2024 and held at that level during the first quarter of this year.  Even so, despite this short-term stability, signs of declining demand for labor are evident over a longer timeframe: both readings are below the pre-pandemic high of 1.24 and down by about one-half from the record high of 2.03 in March 2022.

Overall, labor markets remained healthy in the first quarter: labor supply was relatively strong, and demand for labor stabilized.

Inflation

On balance, inflation trends in the first quarter were encouraging.  As of March 2025, twelve-month inflation—as measured by the headline consumer price index (CPI)—had dropped to a rate of 2.4 percent, down 6.7 percentage points from the June 2022 peak.  The average of monthly inflation rates also slowed over the first quarter: after picking up to an average 0.3 percent per month during the final quarter of 2024 (3.5 percent annualized), monthly inflation eased to an average 0.2 percent (2.6 percent at an annual rate) during this year’s first quarter (see Table 2 – Inflation Indicators).

• CPI inflation for energy goods and services declined in the first quarter—the third quarterly decline of the past four quarters—after turning positive during last year’s final quarter.  Monthly prices fell 0.4 percent on average during the first quarter.
• The exception to the general trend of slowing was food inflation, which stabilized on a quarterly basis in early 2025: the CPI for food increased 0.3 percent per month on average in the first quarter, matching the pace in the previous quarter.  On a monthly basis, however, food prices rose 0.4 percent in March, the fastest monthly increase in more than two years; over the year through March, food prices were up 3.0 percent, a 17-month high.  Price indices for food at home as well as food away from home advanced over the month.  Rapid increases in egg prices drove the rise in the overall food price index in January and February due to outbreaks of avian flu.  Nonetheless a broad range of other grocery store food groups have also contributed to the step up in food inflation.

Monthly core CPI inflation was 0.2 percent per month on average in the first quarter.  On an annualized basis, core inflation was 3.0 percent in the first quarter, marginally slower than the 3.1 percent rate in the previous quarter.  Over the twelve months through March 2025, the core inflation rate slowed to 2.8 percent, down 3.8 percentage points from the post-pandemic peak rate in September 2022.

• Core goods prices increased 0.1 percent on average per month in the first quarter, matching the rate in the fourth quarter.  Prior to late 2024, inflation for core goods was either flat or negative on average for five consecutive quarters.  Core goods prices were down just 0.1 percent over the year ending March 2025, flattening noticeably from the 0.5 percent decline over the year through December 2024. 
• Inflation for rent of housing services (rent of primary residence and owners’ equivalent rent) remained at an average 0.3 percent per month in the first quarter, after slowing to that pace in the fourth quarter.  Prior to the fourth quarter, rent of housing services inflation had largely ranged between 0.4 percent and 0.5 percent—save for two months—since May 2023.  Over the year through March 2025, rent of housing inflation was 4.3 percent, the slowest pace since February 2022.
• Significantly, inflation for non-housing core services slowed to an average 0.2 percent growth per month in the first quarter, from an average 0.3 percent growth per month in the latter half of 2024.  Price inflation eased in several categories, such as transportation services (including motor vehicle insurance, airline fares, and car and truck rentals), as well as hotel lodgings.

Inflation as measured by the PCE price index has notable differences in weights and methodologies versus the CPI.  Over the past 20 years, twelve-month CPI inflation has exceeded PCE inflation by about 0.36 percentage points on average.  Over the year through September 2024, the headline PCE price index stood at 2.1 percent, just 0.1 percentage point above the Federal Reserve’s 2 percent inflation target.  However, more recently, monthly and yearly readings in this metric have accelerated: by February 2025 (latest data available), the twelve-month measure of headline PCE inflation had risen to 2.5 percent.

Risks to the Outlook

As previously noted, respondents to the Wall Street Journal’s survey of economists provided recession probability estimates, but the survey was concluded before President Trump announced a 90-day pause on country-specific tariffs imposed to address longstanding trade imbalances. The survey, published on April 12, assessed a 45 percent chance of a recession in the next twelve months.  Although this probability assessment was roughly double that made in the January survey, it likely does not account for developments on trade negotiations, progress on Tax Cuts and Jobs Act of 2017 (TCJA) extension, or the rebound in financial markets.  Several economists noted the policy uncertainty at the time as a source of uncertainty in their forecasts.  Further, the U.S. economy has proven its resilience over recent years—when recession probability assessments were last this high in 2023, real GDP rose a robust 3.2 percent year-over year.  Nonetheless, Treasury is monitoring risks in the economy that may suggest developing weaknesses.

Labor markets: While labor markets appear healthy in aggregate, some data warrant close monitoring.  For example, hiring according to the Job Openings and Labor Turnover Survey remains slow.  The hires rate has averaged just 3.4 percent since July 2024.  That is a low level for an expansion, comparable to the rates observed in the slow-recovery period of 2013.  Before the recessions of 2001 and 2008, a decrease in the hires rate was a pronounced indicator of future labor weakness.  The decreasing hires rate also predated an increase in the layoffs rate.  Currently, layoffs remain low: the layoffs rate was 1.1 percent on the last business day of February 2025, consistent with the average throughout 2024 and matching the pre-pandemic low.  Given the low level of the hires rate, a spike in the layoffs rate could signal net job losses.

Notably, reductions in federal personnel levels appear to have had minimal impacts on labor markets, other than a modest regional boost to unemployment insurance (UI) claims in the nation’s capital area (DMV, or the District of Columbia, Maryland, and Virginia).  National initial and continuing unemployment insurance claims remained near historical lows through early-April.  Regionally, initial claims in the DMV region began to spike in February and remain elevated, while continuing (or paid) claims continued an uptrend that began in September 2024.  In addition, according to labor turnover survey data, the increase in the federal government layoffs and discharges rate has had no discernable impact on the total layoffs and discharges rate.  Anecdotal reports suggest that state governments are seeking to hire laid-off federal workers, and federal workers with technical or scientific backgrounds should be able to transition quickly to private sector employment.

Household finances: At the end of 2024, households appeared to be in a good financial position in aggregate.  Total household assets were up 8.1 percent ($14.2 trillion) over the year ending in the fourth quarter of 2024 (last available data), largely driven by a $6.4 trillion increase in the value of corporate equity holdings and a $3.2 trillion appreciation in household real estate values.  As a result of these increases in wealth, real personal consumption expenditures (PCE) remained strong in the fourth quarter, contributing 2.7 percentage points to GDP growth.

Stock markets reached record highs in February 2025 before easing some since then; as of closing on Friday, April 25, the NASDAQ Composite was lower by 11.1 percent, the S&P 500 index was down 6.1 percent, and the Dow Jones Industrial Average decreased by 5.7 percent compared to the last business day of 2024.  As middle- and higher-income households are more likely to hold financial assets—and have likely been a key driving force behind aggregate household spending since pandemic-era excess savings have exhausted—the decrease in stock values, if sustained, could slow PCE growth in the near term.

In addition, data are suggestive of increased financial strain among lower-income households, who are more likely to carry credit card debt than higher-income households.  According to the New York Federal Reserve Bank, the total balance of credit card debt was $1.2 trillion in the fourth quarter of 2024, 31 percent higher than just before the pandemic.  Moreover, rates of seriously delinquent credit card debt (90 days or more overdue) have risen recently.  Over the past year, the rate of serious delinquency has risen by 1.6 percentage points to 11.4 percent in the fourth quarter of 2024, the highest reading in thirteen years.  Moreover, transition rates from delinquent (30 or more days past due) to seriously delinquent have also been rising.  Were there to be a shock to the economy, current levels of debt and delinquency make the financial situation of lower-income households more precarious.  When changes in the structure of our economy widen the base of who benefits from economic growth, the economy becomes more resilient and better able to weather temporary fluctuations.

Federal fiscal policies: Key provisions of the TCJA are scheduled to expire on December 31, 2025.  Allowing these provisions to reset would create headwinds to economic growth next year as households’ discretionary spending decisions are based on after-tax income—that is, the scheduled increase in marginal tax rates likely means some pullback in private household spending.  Allowing these provisions to expire would be an unforced error for the economic outlook.

Another policy risk is failing to address the growing federal fiscal imbalance.  The nation’s financial trajectory endangers its economic independence and national security.  In the 2024 fiscal year, the United States government ran a fiscal deficit equivalent to 6.4 percent of GDP, higher than any year from 1947–2008.  Net interest has become one of the largest line items in the federal budget, larger than even spending on national defense.  Credit rating agencies see the country’s rising debt burdens and declining debt affordability as a risk to the United States’ credit rating.  It is necessary to eliminate wasteful and fraudulent federal spending as the first step to correct the nation’s fiscal trajectory.

Conclusion

In the first 100 days of President Trump’s second term, this Administration has pursued an agenda of driving economic growth supported by private-sector demand, bringing down inflation, controlling federal spending, and restoring fairness in U.S. trade relationships.  Market-based supply-side expansion is necessary to bring down inflation sustainably and to make Americans less vulnerable to global inflation, supply-chain disruptions, and geopolitical events.  As the Administration implements its agenda of slashing regulations, lowering the joint burdens of high inflation and high taxes, expanding domestic energy production, and freeing up capital by reducing federal deficits, the American economy will stand on firmer footing for strong, balanced, and sustainable growth.

Table 1 - Labor Market Indicators

Sources. Bureau of Labor Statistics, The Employment Situation - March 2025; Job Openings and Labor Turnover - February 2025.

Table 2 - Inflation Indicators

Sources. Bureau of Labor Statistics, Consumer Price Index - March 2025. Bureau of Economic Analysis, Personal Income and Outlays, February 2025.

¹ For CPI, 12-month growth is not seasonally adjusted.
² Imputed from CPI Data. ³  PCE percent changes for Q1 are averages for January and February. PCE price indices for March will be released on April 30.