U.S. Economy Poised for Q2 Rebound Amid Easing Trade Pressures — Evening Brief – 05.22.25
U.S. economic output is poised to recover in Q2 2025, following a 0.3% annualized decline in Q1—the first contraction since Q1 2022—driven by a surge in imports and reduced government spending. Now, the import cycle is normalizing, easing the trade drag and allowing domestic economic activity to regain momentum. The contraction, rather than a harbinger of recession, was a temporary anomaly driven by external pressures. As these pressures ease, Q2 is poised for a rebound.
Early forecasts project Q2 GDP growth of 2.1% to 2.5%, with the New York Fed’s nowcast at 2.3% (1.3%–3.5% confidence interval) and the Atlanta Fed’s GDPNow model at 2.5%.
Economists anticipate a decline in imports as front-loading eases, reducing the trade drag that subtracted 4.8 percentage points from Q1 GDP. JPMorgan suggests an “import collapse” could trigger a “temporary bounce-back” in Q2. Despite tariff uncertainties, recent de-escalation of trade tensions, particularly with China, has lowered recession risks. JPMorgan’s Michael Feroli noted, “The administration’s dialing down of draconian tariffs should reduce the risk of a recession this year,” with the bank’s recession forecast now below 50%.
Beyond trade, domestic fundamentals remain supportive. Consumer spending, though not roaring, is stable, and business investment continues to drive growth. Morgan Stanley’s chief cross-asset strategist, Serena Tang, highlights the U.S. economy’s relative strength, noting, “The economy is not the market.” With the Federal Reserve unlikely to cut rates before Q3, interest rate expectations are stabilizing, allowing investors to assess equity, credit, and Treasury opportunities with greater clarity.
While the Q2 outlook is promising, risks linger. Goldman Sachs projects a more cautious 2.1% growth rate, with domestic final sales at just 0.1%, pointing to potential demand weakness. Tariff uncertainties, though eased, remain a wildcard, particularly as their impact on exports begins to emerge. May’s economic data will be pivotal, offering a clearer picture of trade blowback and consumer behavior.