Imports increased in the first quarter of the year as the U.S. economy shrank 0.3%, the first contraction in three years. Photo from Unsplash.

News Release

WASHINGTON — The U.S. economy contracted at a 0.3% annual rate in the first quarter of this year, marking the first contraction in three years, as companies rushed to import goods ahead of massive tariffs imposed by Pres. Donald Trump’s administration.

The decline in gross domestic product, reported by the Commerce Department, reversed a 2.4% gain in the final quarter of 2024. Economists largely attributed the pullback to a sharp surge in imports, up 41%, the fastest pace since 2020, which slashed about five percentage points from overall GDP. Consumer spending also slowed, rising just 1.8% after a 4% increase the previous quarter.

Federal government spending plunged 5.1% during the quarter, further weighing on growth.

The contraction surprised some economists, though many had warned it was possible. Analysts surveyed by FactSet had expected the economy to grow 0.8% in the January-March period.

Financial markets tumbled in response. The Dow Jones Industrial Average dropped 400 points at the open, while the S&P 500 and Nasdaq composite fell 1.5% and 2%, respectively.

Despite the headline decline, underlying economic activity showed some resilience. A key measure that strips out trade, inventories and government spending, considered a gauge of core economic strength, grew at a 3% annual rate, up from 2.9% in the prior quarter.

Economists said the import spike is likely temporary, driven by businesses stockpiling foreign goods ahead of Trump’s new tariffs. The administration has imposed levies as high as 145% on Chinese imports, and Trump’s inconsistent policy rollouts have fueled business uncertainty.

“The economy was essentially stagnant in the first three months of the year while growth in headline and core inflation accelerated, fanning concerns of stagflation,” wrote Ryan Sweet, chief U.S. economist at Oxford Economics.

Inflation rose more quickly than expected. The Fed’s preferred inflation gauge, the personal consumption expenditures price index, increased at a 3.6% annual pace in the first quarter, up from 2.4% in the previous quarter. Core PCE, which excludes volatile food and energy prices, climbed to 3.5% from 2.6%.

The figures put new pressure on the Federal Reserve, which has been weighing whether to cut interest rates to support growth or keep them elevated to contain inflation.

Some economists warn that Trump’s trade policies could push the economy further into contraction later this year.

“We think the downturn of the economy will get worse in the second half of this year,” said Carl Weinberg, chief economist at High Frequency Economics. “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.”

Democrats quickly criticized Trump’s trade approach. “One hundred days into his presidency, Donald Trump’s red-light, green-light tariffs are shrinking our economy,” said Sen. Elizabeth Warren, D-Mass. “Businesses are stockpiling imports in anticipation of tariff doomsday.”

There are also early signs the labor market may be softening. Private payroll processor ADP reported Wednesday that employers added just 62,000 jobs in April, well below expectations and down from 147,000 in March. Hiring declined in several sectors, including education, health care, information technology and business services.

Still, economists caution that ADP’s figures can diverge from official government data.