The RSM GDP Nowcast, our model that measures economic growth on a near real-time basis, is pointing to a strong rebound in gross domestic product in the first quarter, reaching 4.5% on an annualized basis.
But this number is likely to ease by the end of the quarter, as distortions related to trade and the government shutdown are factored in. Over the past two quarters, these distortions have caused GDP growth to be both grossly overstated, and understated.
Last year, the economy expanded at a 2.2% annual pace overall while our preferred core metric—real final private demand from domestic purchasers—increased by 2.4% during the final three months of the year.
So even though the RSM GDP Nowcast is currently showing a strong rebound, we think the final number once the first quarter ends will land in the 3% to 3.5% range.
We can be confident that the rebound in government spending following the extended shutdown last fall will add about 1 to 1.5 percentage points to overall GDP growth.
Because of policy-induced distortions, investors, policymakers and the public should expect another top-line estimate of growth that overstates the true underlying trend, which is closer to 2%.
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We also expect nonresidential investment to remain strong as spending on AI and related infrastructure and equipment remains robust.
But a softer labor market and slowing income growth remain our top concerns. The big upside surprise in January payrolls was a key reason the model is showing such a sharp jump in growth. But we think it’s more likely than not that this figure will be revised lower in the coming months.
We also don’t expect the impact of new tax refunds to show up in a meaningful way in the first quarter.
If anything, there are downside risks to consumer spending—a “spending hangover” at the turn of the year, as we have often seen since the pandemic.
Trade, which feeds into net exports, will remain volatile in the first quarter, especially after last week’s Supreme Court decision on tariffs.
Our methodology
RSM GDP Nowcast is a high-frequency econometric model that incorporates new data each week to estimate GDP growth by the end of the quarter. The estimate becomes more accurate as more data comes in. Surprises in key releases—such as inflation or payrolls—can move the GDP Nowcast meaningfully.
