The U.S. economy contracted at the start of the year for the first time since 2022 on a monumental pre-tariffs import surge and softer consumer spending, a first snapshot of the ripple effects from President Donald Trump's trade policy.
Inflation-adjusted gross domestic product decreased an annualized 0.3% in the first quarter, well below average growth of about 3% in the prior two years, according to the government's initial estimate published Wednesday. Net exports subtracted nearly 5 percentage points from GDP, the most on record, the Bureau of Economic Analysis report showed.
Consumer spending — which accounts for two-thirds of GDP — advanced at a 1.8% pace, the weakest since mid-2023. Business outlays for equipment, the lone bright spot in the report, increased at the fastest pace since 2020 and boosted by aircraft and computers.
The GDP data highlight the scramble by companies to secure merchandise ahead of expansive tariffs. Looking ahead, many economists anticipate the higher duties will cause a supply shock, challenging businesses and leading to a pullback in demand as higher prices push cash-strapped Americans closer to the brink.
Forecasters currently see nearly even odds of the U.S. falling into a recession in the next year. Consumers are also growing anxious that tariffs will take a toll on the labor market and drive up the cost of living.
The latest GDP figures showed imports surged an annualized 41.3% — the biggest advance in nearly five years. Because these goods and services aren't produced in the US, they are subtracted from GDP. Economists see the sharp widening of the trade deficit reversing in the second quarter.
Typically, imported merchandise moves into warehouses or directly to storefronts. However, the report showed business inventories contributed 2.25 percentage points to GDP during the quarter, the most since the end of 2021. The recent flood imports may instead show up in higher inventories in coming months and, along with a narrowing trade gap, provide a lift to second-quarter GDP.
Because swings in trade and inventories can sometimes distort overall GDP, economists prefer looking at final sales to private domestic purchasers for a better snapshot of demand. This measure increased at a 3% pace in the first quarter after rising an annualized 2.9% at the end of 2024.
Growth in consumer spending was driven by a broad-based advance in outlays for services and a pickup in nondurable goods.
Several surveys of consumer attitudes have plunged, raising doubts about the ability of households to provide much fuel for the economy. Low-income consumers are already facing hardships of high prices, while wealthier individuals have been set back by this year's drop in stock prices.
Meanwhile, business investment in equipment advanced at a 22.5% annualized rate. In addition to a surge in commercial aircraft shipments months after the end of a strike at Boeing, output of information processing equipment and computers also jumped.
The GDP report also showed that a closely watched measure of underlying inflation accelerated to a 3.5% pace in the first quarter — the most in a year. Detailed data on inflation and consumer spending for the month of March are due later this morning.
The uncertainty over the effect of tariffs on inflation as well as the broader economy has put the Federal Reserve in a tough position. Policymakers have indicated they're in no rush to lower interest rates until they get further clarity on what the White House policies mean for the economy.
While the Trump administration has implemented a 90-day pause on some of the more punitive tariffs announced earlier this month, the country's effective tariff rate now stands at almost 23% — the highest in more than a century — according to Bloomberg Economics. Adding to the uncertainty are some exemptions from previously announced higher duties.
The president and his economic advisors see tariffs as a means to stoke economic growth over the longer term through the revival of manufacturing. Trump also hopes to drive export growth and erase deficits with U.S. trading partners, raise revenue for the government and bolster national security.
