The U.S. economy contracted at a 0.3% annualized rate in the first quarter of 2025, the first negative reading in three years, Commerce Department data showed on Wednesday.
The decline, which fell well short of economists’ expectations for a modest 0.4% expansion, followed a 2.4% gain in the fourth quarter of 2024, as measured by the Department’s seasonally adjusted figures.
The quarterly data, adjusted for inflation and seasonal effects, reflected a sharp rise in imports — up 41.3% between January and March, with a 50.9% increase in goods alone — as U.S. businesses accelerated purchases ahead of new global tariffs announced by President Donald Trump in early April.
According to Wednesday’s report, the import spike subtracted more than five percentage points from headline GDP. Exports, by contrast, rose just 1.8% during the same period.
While many analysts have described the figure as a warning sign, the White House appeared to characterize it as a necessary adjustment. Writing on Truth Social, Trump attributed the contraction to “Biden’s lingering overhang” and claimed that “tariffs have NOTHING to do with it”. “Give it time — our policies are working,” Mr. Trump wrote.
Markets responded less optimistically. At the opening bell, the Dow Jones Industrial Average dropped 1.9% (–756 points), the S&P 500 fell 2.2%, and the tech-heavy Nasdaq Composite lost 2.8%.
The negative GDP reading coincided with a sharp deceleration in consumer spending. While still positive, personal consumption expenditures rose just 1.8%, down from 4% in the prior quarter and the slowest pace since mid-2023. In contrast, private domestic investment surged 21.9%, driven largely by a 22.5% rise in equipment spending — another sign that companies were front-loading expenditures before tariffs took effect.
Federal government spending fell 5.1%, partly as a result of efficiency measures implemented by the Department of Government Efficiency (DOGE), led by Elon Musk. The contraction shaved an estimated 0.3 percentage points off GDP.
One of the Fed’s preferred gauge, the personal consumption expenditures (PCE) price index, rose 3.6% last quarter, compared with 2.4% in Q4. Core PCE, which strips out food and energy, was up 3.5%. A related metric which adjusts for shifting consumer behavior, the chain-weighted price index, jumped to 3.7%, topping the 3% consensus forecast.
The figures add to the uncertainty facing the Federal Reserve as it prepares for its May 3–4 policy meeting. Slower growth may strengthen the case for a rate cut, but the inflation pickup complicates that calculus. In recent days, Trump has stepped up pressure on Fed Chair Jerome Powell to lower interest rates and ease borrowing costs, even suggesting the country’s top banker could be removed before his term ends in May 2026.
Wall Street traders still expect the Fed to start cutting rates in June, with three or four reductions priced in for the rest of the year.
On the labor front, the Employment Cost Index rose 0.9% in Q1, matching forecasts. But private-sector job creation slowed sharply. ADP reported just 62,000 new jobs in April, roughly half of the 120,000 expected. The official nonfarm payrolls report from the Bureau of Labor Statistics is due Friday.
