WASHINGTON – The U.S. economy contracted at a 0.5% annual rate from January through March, driven by disruptions from President Donald Trump’s trade policies, according to a report from the Commerce Department on Thursday. This unexpected downturn marks a significant revision from earlier estimates.
Immediate Impact
The contraction in the first quarter was exacerbated by a surge in imports as businesses and households raced to purchase foreign goods ahead of potential tariffs. This behavior contributed to a significant drag on the economy, reversing a 2.4% growth in the last quarter of 2024 and marking the first economic contraction in three years.
Imports expanded by 37.9%, the fastest pace since 2020, reducing GDP by nearly 4.7 percentage points.
Key Details Emerge
Consumer spending, a crucial component of the economy, decelerated sharply, growing only 0.5%, a stark contrast to the 4% growth observed in the previous quarter. This slowdown reflects the Commerce Department’s downward revision and highlights consumer apprehension amid ongoing trade tensions.
The Conference Board’s latest report indicates a decline in consumer confidence, with June’s index dropping to 93, down 5.4 points from May. A sub-index measuring short-term expectations fell to 69, signaling potential economic challenges ahead.
Expert Analysis
Former Federal Reserve economist Claudia Sahm expressed concern over the revised consumer spending figures, describing them as a “potential red flag.” Sahm, now at New Century Advisors, pointed out reductions in spending on recreation and foreign travel as indicators of consumer pessimism.
“The downward revision to consumer spending today is a potential red flag,” said Claudia Sahm.
Industry Response
The report also noted a 4.6% annual decline in federal government spending, the steepest since 2022. This reduction, coupled with trade deficits, adds complexity to the economic landscape, as imports must be subtracted from GDP calculations to accurately reflect domestic production.
By the Numbers
- First-quarter GDP: -0.5%
- Imports growth: 37.9%
- Consumer confidence index: 93 (June)
- Federal spending decline: 4.6%
What Comes Next
Economists anticipate a rebound in the second quarter, with forecasts suggesting a 3% growth rate, according to a FactSet survey. The initial estimate for April-June GDP growth is expected on July 30, offering further insight into the economy’s trajectory.
As the global trade environment remains volatile, the U.S. economic outlook will largely depend on the resolution of ongoing trade disputes and their impact on consumer and business confidence.
The announcement comes as economists and policymakers closely monitor the effects of trade policies on economic performance and consumer sentiment. The upcoming GDP report will be pivotal in assessing the broader implications of these developments.