The Wall Street sign in the Financial District of Lower Manhattan in New York City. Credit: Tada Images/Adobe Stock
Early in 2025, the narrative surrounding the U.S. economy was that of exceptionalism. The U.S. economy had continued to grow strongly in the face of headwinds, vastly outperforming developed market peers since 2019.
That narrative, however, has been replaced with one of economic uncertainty and caution as fiscal policy changes were announced and put into effect. Since the beginning of the year, economists have sharply lowered their forecasts for Gross Domestic Product (GDP) growth in 2025 and sharply raised their probabilities of a recession. Uncertainty reigns supreme; however, the data has yet to show material evidence of any impacts from these policy changes.
We do have one negative economic data point from early 2025. In the first quarter, the economy shrank for the first time since early 2022. GDP growth from Q4 2024 to Q1 2025 was –0.2% at an annualized rate. This may have been interpreted by some as confirmation of the lowered GDP forecasts for 2025, but we would urge caution in this interpretation. While the economy was certainly influenced by the aforementioned fiscal policy changes, the impacts seen in Q1 GDP are a little more complex.
As companies and individuals pre-bought goods in order to get ahead of tariffs, net exports subtracted nearly 5% from the economy in the first quarter. But a more focused measure of the economy, real final sales to private domestic purchasers (the sum of consumer spending and business investment), grew a solid 2.5% in the first quarter. The large distortion from trade activity in the first quarter will likely wash out later in the year.
While we do not view the Q1 GDP report as an early sign of the true impact of policy changes on the economy, there are other data points to assess the health of the economy and whether a recession might be coming. In particular, we focus on the most influential driver of the economy—consumer spending.
Consumer spending is the backbone of the economy, making up nearly 70% of GDP. Since the pandemic, an interesting trend has developed: despite consumer confidence continually dropping to near Great Recession (2008–2009) levels over the past several years, these negative feelings about the economy have not altered spending behaviors.
Many fears of a recession in 2022 and 2023 that did not come to pass focused on the negative attitudes of consumers, reasoning that spending patterns would not hold up in the face of higher inflation. Those same fears have reignited as uncertainty over the impact of tariffs and other policies has caused sentiment to return to recent lows.
However, as long as consumer spending continues to grow, as it has for the past several years, a recession is unlikely to materialize. Consumers weathered the previous round of price increases, thanks in part to higher wages, excess savings carried over from the pandemic, and increased borrowing. This time, consumers may not have as many tools in their tool belts to offset a potential second round of higher prices, which is contributing to uncertainty in the outlook.
So far in 2025, the labor market has yet to show any material signs of weakness. This may be a comforting data point for some, but the labor market tends to be a lagging indicator of the overall economy. Typically, by the time labor market data starts to show consistent employment declines, the economy is already in a recession. So, while the labor market has remained resilient so far, with job growth averaging 124,000 per month, this does not tell us much about what may still come.
The largest contributors to uncertainty around the economic outlook in 2025 have been tariffs and trade policy; for workers compensation, tariffs will have both direct and indirect impacts. Directly, imported durable medical equipment, supplies, and pharmaceuticals will face higher prices from the increased tax paid by importers. These categories make up roughly 15% of workers compensation medical costs.
Indirectly, higher prices for medical equipment and supplies may increase prices for physician, hospital, and long-term care services over time as higher input costs are passed through to the end consumers.
Stephen Cooper joined NCCI in August 2023 as Executive Director & Senior Economist, leading the Economic Research and Communications Team. The team’s research focuses on economic developments impactful to the workers compensation system, including labor market dynamics, demographics, inflation, interest rates, and state level insights to aid in ratemaking decisions.
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