WASHINGTON — The U.S. economy shrank at an annual pace of 0.5% from January through March, as President Donald Trump’s trade policies disrupted business activities. The Commerce Department reported this unexpected downturn on Thursday, marking a significant deterioration from earlier estimates.
Breaking: Trade Wars Impact Economic Growth
The first quarter’s economic performance was heavily affected by a surge in imports, as American companies and households rushed to purchase foreign goods ahead of impending tariffs. Initially, the Commerce Department had estimated a 0.2% decline in the economy for the first quarter. Economists had anticipated no revision in the department’s final estimate.
Immediate Impact
The January-March contraction in gross domestic product (GDP) reversed a 2.4% increase from the last quarter of 2024, marking the first economic contraction in three years. Imports expanded by 37.9%, the fastest pace since 2020, significantly reducing GDP by nearly 4.7 percentage points.
Key Statistic: Imports expanded by 37.9%, the fastest pace since 2020.
Key Details Emerge
Consumer spending, a critical component of GDP, slowed sharply to a growth of just 0.5%, down from a robust 4% in the previous quarter. This represents a significant downgrade from earlier estimates by the Commerce Department. The anticipation of tariffs has made consumers wary, fearing direct financial impacts.
Consumer Confidence: The Conference Board reported a decline in consumer confidence, with the index sliding to 93 in June, down 5.4 points from the previous month.
Industry Response
Former Federal Reserve economist Claudia Sahm expressed concern over the downward revision in consumer spending, describing it as a “potential red flag.” Sahm, now chief economist at New Century Advisors, noted the downgrades in spending on recreation services and foreign travel, suggesting “great consumer pessimism and uncertainty.”
By the Numbers
- Consumer confidence index fell to 93 in June.
- Short-term expectations index dropped 4.6 points to 69.
- Federal government spending decreased at a 4.6% annual pace.
What Comes Next
The first-quarter import surge is unlikely to repeat in the April-June period, potentially easing its drag on GDP. Economists anticipate a rebound, projecting second-quarter growth to reach 3%, according to a survey by FactSet. The initial reading of April-June GDP growth is expected on July 30.
Background Context
The recent economic developments highlight the impact of trade deficits on GDP. While trade deficits mathematically reduce GDP, they primarily account for domestic production rather than foreign imports. The current scenario reflects how imports, recorded as consumer spending or business investment, must be subtracted to avoid inflating domestic production figures.
Expert Analysis
Economists are closely monitoring the situation, with particular attention on consumer behavior and government spending trends. The decline in federal spending, the largest since 2022, adds another layer of complexity to the economic outlook.
The story of the U.S. economy’s recent contraction continues to unfold, with upcoming data releases and policy decisions likely to shape the narrative further. As experts analyze these developments, the implications for businesses and consumers remain significant.
