By Tom Ozimek
The U.S. economy contracted at an annual rate of 0.5 percent in the first quarter of the year, according to the Department of Commerce, whose third and final estimate of gross domestic product (GDP) for the January–March period marked a further downgrade from its two earlier readings.
The decline in economic activity was largely driven by a surge in imports—which subtract from GDP calculations—a reduction in government spending, and a slowdown in consumer spending, according to the Jan. 26 report from the Bureau of Economic Analysis (BEA), an agency of the Commerce Department.
The import spike that weighed on growth came as businesses accelerated purchases ahead of President Donald Trump’s anticipated tariff policies. Imports began to soar in December 2024 as Trump vowed to impose tariffs once sworn into office, with January 2025 marking another import surge as businesses continued to stockpile goods. The trend of front-running tariffs by increasing imports continued through February and March, putting downward pressure on GDP.
In total, imports expanded by a total of 37.9 percent in the January–March period, the biggest jump since 2020, pushing GDP down by nearly 4.7 percentage points.
Thursday’s final GDP figure of minus 0.5 percent reflected a downward revision of 0.3 percentage point from the previous estimate of a 0.2 percent decline. The first-quarter contraction reversed the 2.4 percent growth recorded in the final three months of 2024 and marked the first quarterly decline in three years.
A significant part of the contraction stemmed from weakening consumer activity. Since the start of the year, real consumer spending has fallen by 0.2 percentage points.
“Consumer spending is 70 percent of the economy, and if that is no longer contributing to growth, we have got a problem,” ING analysts said in a recent note. “Households are anxious about what tariff-induced price hikes will do to their spending power, while concerns about the robustness of the jobs market are on the rise.”
Consumers have grown more cautious amid President Donald Trump’s tariff plans, with multiple sentiment surveys highlighting fears that importers will pass higher costs on to shoppers.
This week, The Conference Board reported that Americans’ assessment of the U.S. economy deteriorated in June, erasing a brief rebound in May and continuing a months-long slide that had dragged confidence in April to its lowest level since the COVID-19 pandemic.
“Tariffs remained on top of consumers’ minds and were frequently associated with concerns about their negative impacts on the economy and prices. Inflation and high prices were another important concern cited by consumers in June,” Stephanie Guichard, senior economist of global indicators at The Conference Board, said in a statement.
Meanwhile, The Conference Board’s measure of consumers’ short-term expectations for income, business conditions, and the job market dropped 4.6 points, to 69—well below the 80 threshold that the think tank considers an indicator of possible recession ahead.
The government’s initial estimate for GDP growth in the April–June quarter is scheduled for release on July 30.
In the meantime, the Federal Reserve Bank of Atlanta’s real-time GDP tracker, known as GDPNow, forecasts a rebound in the second quarter, projecting growth of 2.7 percent driven largely by a sharp increase in exports. A similar “nowcast” from the New York Fed points to a more modest 1.7 percent expansion for the same period.
