U.S. GDP Contracts 0.3% in Q1 as Tariff Fears Drive Record Import Surge

U.S. GDP Contracts 0.3% in Q1 as Imports Surge Ahead of Trump Tariffs

The U.S. economy posted a surprise contraction in the first quarter of 2025, shrinking by 0.3% on an annualized basis, according to the Bureau of Economic Analysis. This marks the first GDP decline since early 2022, driven by a record trade deficit and softer consumer spending as businesses accelerated imports in anticipation of President Trump’s new tariffs.

Record Import Surge Drives Trade Deficit

The headline contraction was fueled by a sharp upturn in imports, which subtract from GDP. Businesses front-loaded orders for foreign goods—especially capital equipment and pharmaceuticals—before tariffs made them more expensive. The resulting trade imbalance significantly outweighed gains in investment, exports, and consumer spending. The U.S. saw a substantial rise in goods imports, excluding food and vehicles, while imports of silver for investment purposes were removed from GDP calculations.

Consumer Spending Slows but Remains Positive

Consumer spending, which accounts for about two-thirds of GDP, rose at a 1.8% pace. While positive, this was a noticeable slowdown from the stronger performance in late 2024. Goods spending was mixed, with gains in nondurables partially offset by weakness in durables. Services spending remained firm, led by healthcare and housing-related categories.

Inflation Pressure Intensifies

The report showed signs of building inflationary pressure. The personal consumption expenditures (PCE) price index climbed 3.6%, up from 2.4% in the previous quarter. Excluding food and energy, core PCE rose 3.5%, suggesting inflation remains sticky. This complicates the Federal Reserve’s path forward, as higher inflation may limit the central bank’s ability to ease rates to support growth.

Mixed Contributions from Investment and Government Spending

Private inventory investment provided a tailwind, particularly in the wholesale drug sector. Real final sales to private domestic purchasers—seen as a better gauge of underlying demand—grew 3.0%, slightly above last quarter’s 2.9%. Government spending declined, weighed by reduced federal defense outlays, though state and local expenditures offered some offset.

Market Forecast: Bearish Short-Term Outlook

Traders should brace for a cautious near-term environment. The contraction in GDP, combined with elevated inflation and trade uncertainty from incoming tariffs, points to downside risk for equities and continued dollar volatility. Unless consumer activity rebounds or trade pressures ease, the near-term growth outlook remains bearish.