WASHINGTON — The U.S. economy experienced a setback, contracting at an annual rate of 0.5% in the first quarter of the year, as trade disruptions linked to President Donald Trump’s policies took a toll on business activity. This development marked a downward shift from earlier projections, according to the Commerce Department’s report released on Thursday.
The unexpected contraction in gross domestic product (GDP) for the January-March period, which indicates the total production of goods and services, reversed a 2.4% growth seen in the final quarter of the previous year. This signified the first contraction in three years. Notably, a rush by American companies and consumers to purchase foreign goods prior to potential tariffs led to an increase in imports by 37.9%, heavily impacting GDP by nearly 4.7 percentage points.
Consumer spending also saw a noticeable decline, growing by only 0.5%, a stark contrast to the 4% increase witnessed in the last quarter of the previous year. This reduction in consumer spending was a notable revision down from prior estimates.
The anticipation of tariffs has left consumers anxious, presumably due to concerns about direct effects on their finances. This sentiment was mirrored in recent data from the Conference Board, which indicated a declining perception of the U.S. economy in June. The board’s consumer confidence index dropped to 93, decreasing 5.4 points from May’s 98.4. A related gauge of short-term expectations regarding income, business climate, and job prospects fell to 69, significantly under the level of 80 that suggests a recession could be on the horizon.
Claudia Sahm, a former Federal Reserve economist and current chief economist at New Century Advisors, highlighted that the downgraded consumer spending figures could be indicative of broader consumer pessimism and uncertainty. This revision focused on categories like recreation services and travel abroad.
The underlying strength of the economy, as measured by a particular component of the GDP data, rose by 1.9% annually from January through March, which, although decent, fell short of the previous quarter’s 2.9% and earlier forecasts of 2.5% growth for the period.
This metric, which reflects consumer spending and private investment while excluding volatile factors such as exports, inventories, and government spending, illustrates the economic environment’s core health. Meanwhile, federal government spending contracted at a 4.6% annual rate, marking the steepest reduction since 2022.
The pattern of declining federal expenditure and increasing trade deficits portrays the disruptive influence of the current administration’s trade policies, which has reduced GDP in mathematical terms. Essentially, GDP accounts for domestic production, not imports, which need subtraction to avoid overstating domestic output.
Economists predict that the significant influx of imports recorded in the first quarter might not recur in the second quarter, potentially alleviating pressure on GDP. Expectation for economic growth during April-June is optimistic, with forecasts suggesting a rebound to a 3% growth rate, based on a survey by FactSet.
The preliminary report on GDP growth for the April-June period is anticipated on July 30.