US economy contracts in Q1 as tariffs unleash flood of imports

The US economy contracted for the first time in three years in the first quarter, swamped by a flood of imports as businesses raced to avoid higher costs from tariffs and underscoring the disruptive nature of President Donald Trump’s often chaotic trade policy.

The Commerce Department’s advance gross domestic product (GDP) report on Wednesday, however, grossly exaggerated the economy’s dimming prospects. Though consumer spending slowed considerably, the pace of growth remained healthy. Businesses also boosted investment in equipment.

Nonetheless, both consumer and business spending likely reflected front-loading before the import duties kicked in. As such, the report reinforced Americans’ growing disapproval of Trump’s handling of the economy as he marks 100 days in office.

Trump swept to victory last November on voter angst over the economy, especially inflation. Consumer confidence is near five-year lows and business sentiment has tanked, while airlines have pulled their 2025 financial forecasts, citing uncertainty over spending on nonessential travel because of tariffs, which economists said will raise costs for companies and households.

“If the blowout on trade was the result of firms pre-buying imported inputs to beat the tariffs, the decay in the trade balance will reverse in second quarter,” said Carl Weinberg, chief economist at High Frequency Economics. “That will generate some GDP growth. However, corrosive uncertainty and higher taxes - tariffs are a tax on imports - will drag GDP growth back into the red by the end of this year.” Gross domestic product decreased at a 0.3% annualized rate last quarter, the first decline since the first quarter of 2022, the Commerce Department’s Bureau of Economic Analysis said in its advance estimate of first-quarter GDP.

It was also weighed down by a decline in federal government spending, likely linked to the Trump administration’s aggressive funding cuts, marked by mass firings and shuttering of programs.

Economists polled by Reuters had forecast that GDP increased at a 0.3% pace in the January-March period.

The survey was, however, concluded before data on Tuesday showed the goods trade deficit surged to an all-time high in March amid record imports, which prompted most economists to sharply downgrade their GDP estimates. The economy grew at a 2.4% pace in the fourth quarter.

Imports jumped at a 41.3% rate, the largest rise since the third quarter of 2020, when the nation was in the throes of the COVID-19 pandemic, which fractured global supply chains. That obliterated a modest rise in exports, resulting in a large trade gap that chopped off a record 4.83 percentage points from GDP.

Imports were driven by both consumer and capital goods. The BEA said it had identified and removed an increase in imports of silver bars as a form of investment in the first quarter.

Transactions in valuables, such as nonmonetary gold and silver, are not treated as investments and therefore purchases of these metals are not included in consumer spending, gross private domestic investment or government spending, it said.

An unusually large amount of non-monetary gold had accounted for some of the jump in imports in the past months, leading to a wide disparity in the GDP estimates. Inventory accumulation rebounded sharply after two straight quarterly declines, blunting some of the hit on GDP from imports.

US stocks opened lower. The dollar gained versus a basket of currencies. US Treasury yields rose.

FRONT-LOADING SUPPORTS CONSUMER SPENDING Consumer spending, which accounts for more than two-thirds of the economy, grew at a 1.8% rate after a robust 4.0% in the fourth quarter. It was supported by outlays on both services and goods, mostly healthcare, housing and nondurable goods. Most households pulled forward spending to avoid higher prices. With the labour market also cooling, consumers are mostly saving.

Trump on Tuesday softened the blow of his auto tariffs through an executive order mixing credits with relief from other levies on parts and materials.

A 145% tariff on Chinese goods, which unleashed a trade war between Washington and Beijing, remains in place, as does an array of other import duties. Trump sees tariffs as a tool to raise revenue to offset his promised tax cuts and to revive a long-declining US industrial base.

Business spending on equipment soared at a 22.5% rate. Final sales to private domestic purchasers, which exclude trade, inventories and government spending, grew at a solid 3.0% rate. But this traditional measure of domestic demand has been distorted by tariffs.

Inflation heated up last quarter. The Personal Consumption Expenditures price index excluding the volatile food and energy components surged at a 3.5% rate, an acceleration from the October-December’s 2.6% pace. The so-called core PCE inflation is one of the inflation measures tracked by the Federal Reserve for its 2% target.

Economists expect the US central bank to resume cutting interest rates at some point this year.

Reuters