U.S. Economy Contracts 0.3% in Q1 Amid Import Surge and Trade Policy Uncertainty
The U.S. economy shrank by 0.3% in the first quarter of 2025, marking the first quarterly contraction in three years, as businesses rushed to import goods ahead of President Donald Trump’s new tariffs.
This surprise dip in GDP—reported by the Commerce Department—comes despite earlier predictions of modest growth. Analysts had expected a 0.4% increase, following a 2.4% expansion in Q4 2024. However, the unexpected spike in imports—driven by tariff fears—dragged down the numbers sharply.
Imports Surge, Businesses Rush to Beat Tariffs
Imports soared by 41.3% in the quarter, with goods alone rising 50.9%. Since imports subtract from GDP, the rush to bring in goods before the new tariff policies took effect shaved over five percentage points off overall growth.
“Maybe some of this is just businesses scrambling ahead of tariff hikes, but make no mistake—growth has vanished,” said Chris Rupkey, chief economist at Fwdbonds.
Exports, meanwhile, rose by just 1.8%, failing to offset the import spike.
Mixed Economic Signals for the Fed
The report offers mixed signals for the Federal Reserve ahead of its upcoming policy meeting. On one hand, the shrinking economy could make a case for interest rate cuts. On the other hand, inflation is rising again—potentially giving the Fed reason to hold steady.
The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) price index, rose 3.6% for the quarter—up from 2.4% in Q4. Core PCE, which excludes food and energy, climbed 3.5%. A related measure, the chain-weighted price index, jumped 3.7%, exceeding estimates.
Markets continue to expect a rate cut in June, with four total cuts priced in for the year—suggesting Wall Street believes the Fed will prioritize growth over inflation.
Consumer Spending Slows, Investment Rises
Consumer spending, while still positive, showed signs of cooling. Personal consumption expenditures rose 1.8%, down from 4% in the previous quarter—the slowest pace since mid-2023.
Private domestic investment told a different story, rising 21.9%—driven largely by a 22.5% surge in equipment spending, which may also be related to tariff pre-buying.
Federal government spending fell by 5.1%, trimming another third of a percentage point off GDP.
Robert Frick, economist at Navy Federal Credit Union, said the main concern is softening consumer demand: “The weaker spending might just reflect bad weather and last year’s holiday spending spike. It’s concerning, but not yet alarming.”
Trade Policy Uncertainty Looms
Trump’s trade policies remain in flux. In early April, he announced 10% blanket tariffs and “reciprocal duties” on dozens of nations, but quickly paused implementation for 90 days to allow for negotiations. So far, no major deals have been confirmed, though officials suggest progress is being made.
Trump did not address the GDP data directly in his Truth Social post after the report but blamed the economy’s poor start on “Biden’s Stock Market.” He claimed a boom is coming, writing, “Companies are moving to the USA in record numbers… but we have to get rid of the Biden overhang.”
Recession Risks and Job Market Outlook
While the economy is still adding jobs, the first-quarter GDP drop raises concerns about a potential recession. Traditionally, two straight quarters of negative growth signal a recession, although the National Bureau of Economic Research defines it more broadly as a widespread and sustained decline in activity.
The Bureau of Labor Statistics also reported that employment costs rose 0.9% in Q1—matching expectations.
All eyes now turn to Friday’s upcoming jobs report. Private payrolls processor ADP reported just 62,000 jobs added in April—another potential red flag.