The Atlanta Fed expects the U.S. economy to potentially shrink in Q1, with the Federal Reserve likely to cut interest rates three times this year

According to the latest forecast from the Atlanta Federal Reserve, the U.S. economy may fall into contraction in the first quarter of 2025. The bank's GDPNow model indicates that the U.S. Gross Domestic Product (GDP) is expected to shrink by 1.5% during the period from January to March, a significant downward adjustment from previous forecasts.

This adjustment is primarily influenced by consumer spending falling short of expectations and weak exports. Previously, the model had anticipated a GDP growth of 2.3% for this quarter before the release of consumer spending data on Friday, but due to adverse weather in January affecting consumption activities, along with weak exports, the forecast was drastically revised downwards.

Although the GDPNow model is highly volatile and typically becomes more accurate later in the quarter, this trend aligns with other economic data indicating that U.S. economic growth is under pressure.

"Despite the significant volatility in GDPNow's real-time forecast data, this latest information is still alarming," said Mohamed El-Erian, Chief Economic Advisor at Allianz Group and Dean of Queens' College, Cambridge, on social media platform X.

At the beginning of February this year, the forecasting model had once predicted GDP growth could reach 3.9%, but as more economic data was disclosed, the forecast value continued to decline.

Data released by the U.S. Department of Commerce on Friday showed that personal consumption expenditures (PCE) fell by 0.2% in January, far below the market expectation of a 0.1% increase. After adjusting for inflation, real consumption expenditures decreased by 0.5%, directly leading to a 1 percentage point reduction in GDP growth forecasts, bringing it down to 1.3%.

Additionally, the contribution of net exports to GDP also plummeted from a previous -0.41 percentage points to -3.7 percentage points, further dragging down economic growth. This reflects weak global demand and pressure on U.S. exports.

Meanwhile, the decline in the consumer confidence index and concerns over rising inflationary pressures have also heightened market uncertainty. Another report from the Department of Commerce indicated that the core personal consumption expenditures (PCE) price index, a preferred inflation gauge of the Federal Reserve, fell to 2.6% in January, down 0.3 percentage points from December of last year, which somewhat alleviated market concerns over high inflation.

Labor market data released this week is also concerning. The number of initial jobless claims in the U.S. reached a new high since October of last year, indicating that the labor market may be cooling.

At the same time, the U.S. bond market is also signaling an economic slowdown. The yield on 3-month U.S. Treasury bonds exceeded that of 10-year Treasury bonds this week, creating an inverted yield curve, which is typically seen as a reliable indicator that the economy may enter a recession in the next 12 to 18 months.

The uncertainty surrounding the economy and policy has led to a turbulent start for the stock market in 2025. Although the Dow Jones Industrial Average has risen by 2% year-to-date, the market has experienced significant fluctuations due to changes in economic data and policy expectations. RSM U.S. Chief Economist Joseph Brusuelas warned, "The market's excessive optimism is about to be shattered by reality."

As economic data worsens, the market increasingly believes that the Federal Reserve will take measures to cut interest rates to stabilize the economy. Data from the federal funds futures market shows that the probability of a 25 basis point rate cut in June has risen to 80%, with expectations for three rate cuts throughout the year