US Economy Could Shrink 2.8% in Q1, Paving the Way for a "Trumpcession"

The US economy is facing significant headwinds, with the Federal Reserve Bank of Atlanta’s GDPNow model forecasting a 2.8% contraction in gross domestic product (GDP) for the first quarter of 2025. This would mark one of the steepest economic declines since the COVID-19 lockdowns, and the sharp turnaround in economic expectations signals potential trouble ahead for both the broader economy and the crypto markets.

The updated forecast from the Atlanta Fed sharply contrasts with predictions just a month ago, which suggested the US economy was on track to grow by nearly 4% in Q1. While GDP projections from institutions like the Atlanta Fed’s GDPNow model can often fluctuate, a range of economic indicators now points to a concerning downturn, which could also reverberate through global markets.

The "Trumpcession" and Economic Strain

The term "Trumpcession" has been coined by some economists to describe the economic turbulence potentially caused by former President Donald Trump’s trade policies, particularly his tariff plans. With a GDP contraction of 2.8%, the US would experience the most significant economic slowdown since the second quarter of 2020, when the economy plunged by 32.9% during the early stages of the pandemic lockdowns.

Several factors are contributing to the current pessimistic forecast. One significant factor is the record-high $153 billion trade deficit in January, as reported by the Census Bureau on February 28. This marks a 25.6% increase from December, which some experts attribute to businesses rushing to import goods before Trump’s tariffs took full effect. These trade imbalances are putting additional pressure on the economy, further complicating the already fragile economic recovery.

Declining Consumer Confidence and Spending

Further evidence of economic stress can be found in recent consumer data. The Conference Board’s consumer confidence index dropped sharply from 105.3 in January to 98.3 in February, marking the largest month-to-month decline since August 2021. At the same time, consumer spending fell 0.2% in January, a sign of weakening demand as inflationary pressures rise.

Billionaire investor Warren Buffett has raised concerns that Trump’s tariffs could lead to higher inflation and hurt American consumers in the long term. The economic uncertainty created by these policies could be playing a role in the current economic slowdown, and this is likely contributing to the recent slump in both traditional financial markets and the cryptocurrency space.

Crypto Market Impact

The effects of the economic downturn are also being felt in the cryptocurrency markets, where Bitcoin (BTC) and Ether (ETH) have both seen sharp declines in recent weeks—down 10.2% and 21.6%, respectively, over the past two weeks. Although Trump has positioned himself as a proponent of cryptocurrency, promising to make the US the "crypto capital of the world," his policies appear to be having the opposite effect. Since his inauguration on January 20, over $670 billion has been wiped from the total crypto market capitalization.

Divergent Economic Forecasts

While the Atlanta Fed’s GDPNow model paints a grim picture, not all economic indicators are so bleak. The Federal Reserve Bank of New York, for example, is forecasting a 2.9% increase in GDP for the first quarter. Similarly, the Federal Reserve Bank of Dallas has projected a 2.4% rise in economic output. These differing forecasts underscore the uncertainty surrounding the US economy and highlight the varying methods used by different Federal Reserve branches to assess economic performance.

The Atlanta Fed’s GDPNow model uses methodologies similar to those of the Bureau of Economic Analysis to estimate GDP changes, while the New York Fed’s model applies Bayesian estimation techniques and advanced filtering to account for a broader array of economic data. Meanwhile, the Dallas Fed places a stronger emphasis on state-level data, which may provide a more localized view of economic conditions.

Conclusion

As the first quarter of 2025 progresses, it remains to be seen whether the US economy will indeed contract as predicted by the Atlanta Fed, or whether more optimistic models will prevail. What is clear, however, is that the fallout from Trump’s trade policies, combined with weakening consumer confidence and ongoing inflationary pressures, is creating significant challenges for the American economy. With the potential for a "Trumpcession" looming, markets—especially cryptocurrencies—are bracing for more volatility in the coming months.