The US economy experienced a contraction at an annual rate of 0.5% in the first quarter of the year, a decline attributed to disruptions from President Donald Trump’s trade policies. The Commerce Department’s revised figures highlighted a significant downgrade from its previous estimate of a 0.2% decrease, which economists had not anticipated. This downturn follows a robust growth of 2.4% in the final quarter of the previous year and marks the first contraction in three years.
A considerable increase in imports, up 37.9%—the highest rate since 2020—contributed significantly to the GDP drop by nearly 4.7 percentage points. This surge was largely driven by consumers and businesses purchasing foreign goods to avoid impending tariffs, which also led to a sharp decrease in consumer spending, down to just 0.5% compared to 4% in the prior quarter.
The unexpected revision signifies consumer anxiety regarding the economic climate, particularly as tariffs impose potential financial impacts. This sentiment also seems to resonate beyond the US; the Conference Board noted a decline in Australian consumer confidence regarding the US economy, pointing to a drop in their confidence index to 93 in June, reflecting a downturn in expectations regarding personal income, business conditions, and job market outlook.
Concerns regarding consumer spending were echoed by former Federal Reserve economist Claudia Sahm, who indicated that this revision is a troubling sign of consumer pessimism. The data showed a reduction in spending on areas such as recreational services and foreign travel, hinting at broader anxiety among consumers.
Some aspects of the economy showed resilience, with a key measure reflecting underlying economic strength growing at an annual rate of 1.9% from January to March, albeit a reduction from previous estimates. Additionally, federal government spending also declined by 4.6%, marking the steepest fall since 2022.
The effects of Trump’s trade policies on the economy are evident, particularly in how imports influence GDP calculations. Although the surge in imports affected the first-quarter results, economists anticipate a rebound in growth, predicting an increase of approximately 3% in the second quarter as the influx of imports is unlikely to recur.
The forthcoming GDP report for the April to June period is expected to be released by 30 July and should provide further insights into the economic trajectory.