US Economy Shrinks 0.5% Between Jan–March: Trade War Jitters, Import Surge Blamed - Will Q2 Rebound Save 2025?

The US economy contracted at an annual pace of 0.5% between January and March, the Commerce Department reported Thursday, marking a deeper decline than the previous estimate of 0.2%. The revised figures reflect the negative impact of President Donald Trump's trade tensions, which triggered a surge of imports and disrupted business activity.

Import Surge Ahead of Tariffs Hits GDP
US companies raced to stockpile foreign goods before expected tariffs took effect, resulting in a 37.9% jump in imports—the fastest rise since 2020.

While imports technically reflect business activity, they subtract from GDP as they represent goods produced outside the country. According to the report, the import boom knocked nearly 4.7 percentage points off overall GDP.

As the GDP methodology explains, imports—which show up in the GDP report as consumer spending or business investment—have to be subtracted out to keep them from artificially inflating domestic production.

Consumer Spending and Government Cuts Add Pressure
Consumer spending, which drives two-thirds of US economic activity, also slowed sharply in the first quarter. Meanwhile, federal government spending fell at a 4.6% annual rate—its steepest drop since 1986.

These combined factors reversed the 2.4% growth recorded in the last quarter of 2024 and marked the first economic contraction in three years.

Outlook: Rebound Expected in Q2
Despite the dismal first quarter, economists are hopeful for a rebound. The surge in imports was likely a temporary reaction to looming tariffs and won’t repeat in the April-June period, easing pressure on GDP.

According to a FactSet survey of forecasters, the economy is expected to grow by 3% in Q2, bolstered by stabilizing trade dynamics and resilient domestic demand.

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The Commerce Department’s latest report is the final revision for Q1 GDP. The first official estimate for second-quarter economic performance will be released on July 30.
 

(With Inputs From AP)