US Economy Contracts By 0.2% In Q1, Labor Market Shows Signs Of Cracks As Jobless Claims Surge

The U.S. economy confirmed signs of fragility in early 2025, as gross domestic product slipped into negative territory, while latest unemployment benefits surged to the highest levels since 2021, suggesting headwinds for growth and hiring.

GDP Contracts, Corporate Profits Slide

In the first quarter of 2025, the U.S. gross domestic product shrank at an annualized rate of 0.2%, according to the second estimate by the Bureau of Economic Analysis. While the figure marks a slight upward revision from the initial 0.3% drop reported in April, it remains a sharp slowdown from the 2.4% expansion recorded in the final quarter of 2024.

The downturn was largely driven by a spike in imports, as companies raced to secure goods ahead of Donald Trump‘s trade tariffs—a factor that subtracts from GDP in its calculation. Meanwhile, federal spending declined following cost-cutting mandates by the Department of Government Efficiency, led by Elon Musk.

Consumer spending, the main engine of the U.S. economy, rose just 1.2% on an annualized basis—down from a previously estimated 1.8% and far below the 4% surge in the fourth quarter of 2024. It was the weakest growth in household outlays since the second quarter of 2023.

Corporate earnings also took a hit. Preliminary estimates showed that company profits declined 3.6% quarter-over-quarter to $3.192 trillion. This marked a reversal from a 5.9% gain in the prior quarter and represented the largest drop since the pandemic-era slump in late 2020.

The personal consumption expenditures (PCE) price index—a preferred inflation gauge for the Federal Reserve—rose 3.6% in the first quarter, unchanged from the advance estimate. Core PCE, which excludes volatile food and energy prices, was revised slightly lower to 3.4% from 3.5%, suggesting marginal easing in underlying price pressures.

Continuing Jobless Claims Hit Multi-Year High

Fresh labor market data released Thursday signaled growing strain. Initial jobless claims climbed to 240,000 for the week ending May 10, a 14,000 increase from the previous week and above market expectations of 230,000.

It was the highest weekly print in over a month and the third-largest jump year to date.

More strikingly, continuing claims—those who remain unemployed and are receiving benefits—rose to 1.919 million in the week ending May 17, up from 1.893 million previously. That marked the highest reading since November 2021.

Market Reactions

Markets responded with caution. The U.S. dollar index dropped 0.4% to 99.56, sliding from an overnight high of 100.54.

Futures tied to U.S. equity indices pared overnight gains.

The S&P 500 dipped 0.1% after the economic data to 5,935, though it remains set to open 0.4% higher thanks in part to Nvidia Corp.’s NVDA strong earnings and a court decision to block new tariffs proposed by President Donald Trump.

The Nasdaq 100 slipped slightly from 21,630 to 21,590 but is still poised to open up 0.6%.

Investors will now look to Friday's inflation data and any Fed commentary for further clues on the policy outlook.

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