The US economy experienced a contraction of 0.5% annually from January to March, a downturn attributed to the impact of President Trump’s trade policies, as reported by the Commerce Department on Thursday, which adjusted earlier estimates downward.
In the first quarter, growth was negatively affected by a notable increase in imports, as American businesses and consumers hurried to purchase foreign products ahead of anticipated tariffs from Trump.
Previously, the Commerce Department estimated a 0.2% decline in the economy for the first quarter, and many economists had expected no changes in the final figures.
Consumer spending took a sharp downturn, growing just 0.5%, a significant drop from the more robust growth seen in the latter part of 2024.
From January to March, the country’s gross domestic product (GDP) fell, reversing a 2.4% growth in the previous three months of 2024, marking the economy’s first decline in three years.
Imports surged by 37.9%, the highest rate since 2020, contributing nearly 4.7 percentage points to the GDP reduction.
Despite the decline, other categories reflecting the economy’s underlying strength grew at an annual rate of 1.9% during the same period, a moderate number that was down from earlier estimates of 2.9% and 2.5% for the previous quarters.
This specific category includes aspects like consumer spending and private investment, intentionally excluding items like exports, inventories, and government expenditures, which can be less stable.
Ryan Sweet from Oxford Economics indicated that while the situation looks “nasty,” he doesn’t foresee major shifts in his short-term economic predictions.
Additionally, federal spending has seen its largest decrease since 2022, falling at a rate of 4.6% per year.
A trade deficit contributes negatively to GDP, introducing a layer of complexity to economic calculations.
Typically, GDP is calculated based on domestic production, excluding overseas production. Thus, imports that contribute to GDP as consumer spending or business investments may lead to inflated domestic production figures.
Economists suggest that the considerable influx of imports seen in the first quarter is unlikely to be replicated in the April to June quarter.
In fact, there’s an expectation that GDP growth will rebound to around 3% in the second quarter, according to a survey conducted by the data company Factset.
The initial estimate of GDP growth for the April to June period is set to be released on July 30th.
