Analyzing GDP and Employment Index

With the recent GDP report and the Employment Cost Index reports, economists from Nationwide offer the following analysis.

Nationwide Chief Economist Kathy Bostjancic offers an analysis of Q1 GDP.

Real GDP contracts in Q1 on tariff-related import surge as inflation accelerates

• The weakness and mix of GDP growth reflects the rush of importers and consumers to purchases goods ahead of the prospective tariffs. Looking ahead, we look for economic weakness to persist to some degree, but the composition of GDP growth should significantly shift in the face of the higher tariffs as imports, consumption and wholesale inventories all move lower. We look for consumer spending to slow as consumers have pulled forward spending on goods from future months, the tariff price shock should curtail spending, and a softening in the labor market will importantly weigh on household outlays.
• The surge in imports (5%) ahead of prospective tariff increases led real GDP to contract in Q1 for the first time since 2022.  Net exports detracted an outsized 4.8% from GDP growth.
• Consumer spending rose a solid 1.8% on the quarter, in part reflecting the same rush to purchase goods – particularly nondurable goods- ahead of the coming tariffs. Consumption on services was also healthy, but that was focused on spending on health care as well as housing and utilities not as much on discretionary spending on restaurants.
• Federal government spending contracted 5.1% in Q1, though much of the decline was in defense spending (-8%), while nondefense spending fell just 1% and increases in state and local government spending provide an offset.
• Inventories accounted for the largest contribution to GDP growth, led by a jump in wholesale inventories that reflects the surge in imports.
• In a bright spot, business spending on equipment rose a strong 22%, as spending on information processing equipment led the way.
• Core GDP – final sales to domestic purchases came in a strong 3% in Q1 reflecting the jump in business investment and solid consumer spending.
• The pop in the inflation measures was unexpected, with the core PCE price index accelerating to 3.5%, up from 2.6% in Q4. In the details prices on nondurable goods rose 3% and services up 4.2%. We will get more insight into these increases with the 10 am PCE March data.

Nationwide Senior Economist Ben Ayers offers an analysis of the Employment Cost Index

Steady softening of wage costs:

• Wage costs for businesses continued to slowly cool in early 2025 as the labor market has moved into a more balanced position. This is a welcome sign for many firms contending with potential sharp increases in input costs this year due to tariffs. The fading bargaining power for workers should also ease broader services inflation across the economy.
• The Employment Cost Index posted a softer 0.9% gain during the first quarter. A jump in benefits drove the gain this time as wages and salaries for workers rose at the slowest pace since 2020. The annual increase for the ECI edged down to 3.6%, extending the gradual cooldown since 2022 but was still running above the pre-Covid trend. We expect job gains to slow in 2025 as firms react to tariff costs and the elevated uncertainty for the outlook. This should help wage costs to cool further to around the pre-pandemic average of 3.0% later this year.

• Compensation for workers in goods-producing industries rose sharply in the first quarter. Wage increases across service industries were softer in a sign of building softness in demand for services by consumers. There was a notable jump in benefit costs for private sector workers in the first quarter that may add further cautiousness for firms to add employees this year.