The U.S. economy is displaying evident signs of cooling in early 2025, with GDP growth slowing dramatically to 1.1% in the first quarter, down from 2.6% at the end of 2024. This represents the weakest economic expansion in two years, occurring alongside stubbornly high inflation, which remains at 5% year-over-year through March. The Federal Reserve has responded with another interest rate hike in May, pushing rates to the 5-5.25% range in their ongoing battle against inflation. Despite these challenges, unemployment has held steady at 3.6%, though deeper analysis reveals concerning trends in labor force participation that suggest the job market may not be as resilient as topline figures indicate.
Economic Growth Falling Below Long-Term Trends
The recent GDP growth rate of 1.1% reported by the Bureau of Economic Analysis falls significantly below the historical average of approximately 2.5% that the U.S. has maintained over the past decade. This represents a concerning downshift in economic momentum that hasn’t been seen since the uncertainty of early 2023. When adjusted for inflation, real GDP growth appears even more anemic, creating ripple effects across various sectors of the economy.
Inflation continues to run hot with the 5% year-over-year rate as of March 2025 driven primarily by three key categories. Food prices have increased by 6.2%, energy costs are up 7.4%, and housing expenses have risen 4.8% according to the Bureau of Labor Statistics. Food inflation remains particularly stubborn despite multiple Federal Reserve interventions, creating persistent pressure on household budgets.
The Federal Reserve’s decision to raise rates again in May reflects growing concern about entrenched inflationary expectations. Federal Reserve Chair Janet Williams stated, “We remain committed to bringing inflation back to our 2% target and will continue taking necessary steps to achieve price stability.” This hawkish stance prioritizes inflation control over growth stimulation, signaling that further economic slowing may be accepted as a necessary trade-off in the battle against rising prices.
Consumer Wallets Tightening Amid Price Pressures
Retail sales data paints a concerning picture of weakening consumer spending power. The 1% decline in March 2025 compared to February marks the third consecutive monthly decrease according to Bureau of Economic Analysis figures. Electronics sales have dropped 2.3%, apparel spending is down 1.8%, and even typically resilient restaurant spending has declined by 0.7%.
These spending reductions coincide with plummeting consumer confidence, which has fallen to 101.3 in April—its lowest level since July 2022. Survey results from the Conference Board show 64% of consumers now cite inflation as their primary economic concern, while 42% express anxiety about job security. This represents a significant shift in consumer sentiment from just six months ago when these figures stood at 51% and 28% respectively.
E-commerce growth has also cooled dramatically, especially for specialty food retailers dealing with volatile ingredient prices. The current year-over-year growth rate of 8% for online retail in Q1 2025 represents a sharp deceleration from the 22% growth seen during 2021-2022. Digital shopping habits appear to be normalizing after the pandemic-driven surge, with consumers showing more price sensitivity in their online purchasing decisions.
Housing Market Feeling the Interest Rate Squeeze
The housing sector continues to struggle under the weight of elevated mortgage rates. The National Association of Realtors reports that existing home sales have fallen 2.4% year-over-year in March 2025, creating an increasingly challenging environment for both buyers and sellers. Meanwhile, the median home price has climbed to $375,700, representing a 3.5% increase from the previous year and an eye-popping 45% jump from pre-pandemic levels in early 2020.
The current 30-year fixed mortgage rate of 6.27% has dramatically reduced affordability for potential homebuyers. A buyer purchasing the median-priced home with a 20% down payment now faces a monthly payment approximately $650 higher than they would have paid for the same house in early 2022. This affordability gap has pushed many would-be buyers to the sidelines and restricted mobility within the housing market.
Regional disparities in housing performance have become increasingly pronounced. Coastal markets in California and the Northeast have experienced sales declines of 4.2% and 3.8% respectively, while Midwest markets have shown relative stability with a more modest 1.1% reduction in sales volume. These regional differences reflect varying levels of affordability pressure and housing inventory constraints across different parts of the country.
Business Investment Showing Mixed Signals
Business investment presents a complicated economic picture with varying conditions across different sectors. Nonresidential fixed investment grew by 3.7% in Q1 2025 according to Bureau of Economic Analysis data, but this headline figure masks significant disparities between industries. Technology sector investment increased by 6.2% while manufacturing investment actually contracted by 1.8%.
The manufacturing sector appears particularly stressed, with the Institute for Supply Management’s Purchasing Managers’ Index (PMI) registering 47.1 in April. Any PMI reading below 50 signals industry contraction, and this figure represents the third consecutive month of manufacturing decline. Supply chain pressures continue to affect production capacity, with food manufacturers seeking tariff exemptions to maintain competitive pricing.
Corporate profits tell a similar story of economic strain, declining 2.3% year-over-year in Q4 2024. Lisa Chen, CEO of Midwest Manufacturing Alliance, recently commented: “The combination of persistent inflation, high borrowing costs, and uncertain demand forecasts has created an exceptionally challenging environment for capital investment decisions. Many of our member companies are postponing expansion plans until economic conditions show more stability.”
Labor Market: Tight But Showing Cracks
The job market presents one of the economy’s most resilient areas, though signs of cooling are emerging. Job openings have fallen to 9.6 million in March 2025 according to Bureau of Labor Statistics data, down from the peak of 11.5 million in 2022 but still well above pre-pandemic levels of around 7 million in 2019. This represents a gradual normalization rather than a collapse in labor demand.
Wage growth continues at 4.2% year-over-year, but with inflation running at 5%, workers are effectively experiencing declining purchasing power. This negative real wage growth represents a key factor in weakening consumer confidence and spending capacity. Perhaps surprisingly given these conditions, the quits rate has remained steady at 2.5% in March, suggesting that workers still maintain some confidence in their ability to find new employment if needed.
The labor market continues to be characterized by skills mismatches that create simultaneous worker shortages in some sectors alongside difficulty finding employment in others. Healthcare, technology, and specialized manufacturing positions remain difficult to fill, while administrative and retail positions face greater competition. Food production employers report significant challenges finding qualified workers while managing rising ingredient costs.
Global Factors Compounding Domestic Challenges
The U.S. economy doesn’t exist in isolation, and international economic conditions are playing a significant role in the current slowdown. The U.S. trade deficit widened to $64.2 billion in March 2025 according to U.S. Census Bureau data, exacerbated by a strengthening dollar that has gained 2.3% in value against a basket of major currencies year-to-date. This currency strength makes U.S. exports more expensive in foreign markets while making imports comparatively cheaper.
The International Monetary Fund has forecast global economic growth at 2.8% for 2025, representing a modest improvement from 2024 but still below pre-pandemic averages. However, this global growth is unevenly distributed, with emerging Asia leading at 4.7% expected growth while Europe lags at just 1.3%. Recent tariff disputes affecting food products between major trading partners threaten to further complicate the international trade picture.
Supply chain disruptions continue to create unexpected pressures on businesses and consumers alike. Geopolitical tensions in Eastern Europe and the South China Sea have disrupted shipping routes and commodity flows, while climate-related disruptions have affected agricultural production in key growing regions. These global factors add layers of complexity to an already challenging domestic economic environment, suggesting that the path back to robust growth may depend on both domestic policy adjustments and international developments.