The U.S. economy experienced a contraction in the first quarter of 2025, primarily attributed to a significant surge in imports that coincided with the beginning of President Donald Trump’s second term. This development comes as the administration engages in a potentially expensive trade war.
According to a report released by the Commerce Department on Wednesday, the Gross Domestic Product (GDP), representing the overall output of goods and services from January through March, declined at an annualized rate of 0.3%. This marks the first quarter of negative growth since the first quarter of 2022.
Economists polled by Dow Jones had anticipated a GDP increase of 0.4%, following a robust 2.4% growth in the previous quarter. However, a revision of forecasts among some Wall Street economists in response to an unanticipated rise in imports indicated that the outlook for negative growth was more likely, as both businesses and consumers rushed to stockpile goods ahead of impending tariffs set to take effect in early April.
In fact, imports surged by 41.3% during the quarter, bolstered by a staggering 50.9% increase in goods alone. Because imports detract from GDP, this significant uptick may mitigate the negative implications of the contraction, suggesting a possible reversal in future quarters. Notably, imports accounted for over 5 percentage points of the GDP decline, while exports saw a modest increase of 1.8%.
Chris Rupkey, chief economist at Fwdbonds, remarked, “Perhaps some of this negativity is due to a rush to bring in imports before the tariffs go up, but there is simply no way for policy advisors to sugar-coat this. Growth has simply vanished.”
Consumer spending, while still showing growth, decelerated during the quarter. Personal consumption expenditures rose by 1.8%, marking the slowest quarterly gain since the second quarter of 2023 and a decrease from the previous quarter’s 4% increase.
On a more positive note, private domestic investment surged 21.9% during this period, primarily driven by a 22.5% jump in equipment spending, a trend that may also be linked to pre-tariff adjustments.
Federal government spending contracted by 5.1%, which contributed to a slashing of about one-third of a percentage point from GDP.
Robert Frick, corporate economist with Navy Federal Credit Union, stated, “No surprise that GDP took a hit in the first quarter, mainly because the balance of trade exploded as companies imported goods excessively to avoid tariffs. The more telling number for the future of the expansion was consumer spending, which grew, albeit at a relatively weak speed. That’s concerning but not alarming; it could have been influenced by bad weather and heightened spending at the end of last year.”
Following the report’s release, stock market futures dipped, while Treasury yields climbed.
President Trump addressed the report in a post on Truth Social, not specifically mentioning GDP but referring to what he termed “Biden’s Stock Market, not Trump’s.” He asserted that “Tariffs will soon start kicking in, and companies are starting to move into the USA in record numbers. Our Country will boom, but we have to get rid of the Biden ‘Overhang.’ This will take a while, has NOTHING TO DO WITH TARIFFS, only that he left us with bad numbers, but when the boom begins, it will be like no other. BE PATIENT!!!”
Inflation Higher
The report has sent mixed signals to the Federal Reserve ahead of its policy meeting scheduled for next week. While the contraction in growth may lead the central bank to consider lowering interest rates, emerging inflation data could cause them to hesitate.
The personal consumption expenditures price index, favored by the Fed as a measure of inflation, registered a 3.6% increase for the quarter, a sharp rise from the 2.4% growth seen in the fourth quarter. The core PCE, which excludes food and energy, also jumped by 3.5%. Federal officials believe the core metric offers a clearer picture of long-term inflation trends.
Additionally, the chain-weighted price index, which accounts for shifts in consumer behavior and other factors, rose by 3.7%, exceeding the 3% benchmark.
Market expectations still indicate a possible rate cut at the upcoming June meeting, with a total of four rate decreases anticipated by year-end, hinting that the Fed may prioritize stimulating economic growth over controlling inflation.
On the same day, the Bureau of Labor Statistics reported that the employment cost index increased by 0.9% in the first quarter, aligning with forecasts.
Despite ongoing job growth and consumer spending, the GDP report highlights the potential risk of recession and raises the stakes for President Trump as he navigates negotiations with U.S. trading partners.
Typically, a recession is defined by two consecutive quarters of negative growth. However, the National Bureau of Economic Research employs a broader definition, describing it as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.”
Upcoming indicators will include the Bureau of Labor Statistics’ nonfarm payroll data, due to be released on Friday. A report from payrolls processing firm ADP indicated that private hiring rose by a mere 62,000 in April.
