Imports spike, consumer spending slows, and GDP contracts for the first time in three years
The U.S. economy unexpectedly contracted at an annual rate of 0.5% in the first quarter of 2025, according to revised figures released Thursday by the Commerce Department. The drop, deeper than the previously reported 0.2% decline, marks the first quarterly contraction since 2022 and reflects the intensifying impact of President Donald Trump’s trade policies.
The downturn was driven by a dramatic 37.9% surge in imports, as businesses and consumers scrambled to buy foreign goods ahead of new tariffs. That import wave slashed nearly 4.7 percentage points from GDP. In contrast, the economy had grown at a 2.4% pace in the final quarter of 2024.
Consumer spending weakens sharply
Consumer spending — which accounts for nearly 70% of GDP — slowed significantly, rising only 0.5% after a 4% gain in the previous quarter. The downgrade from earlier estimates signals growing caution among households, many of whom are bracing for higher prices due to tariffs on imported goods.
“The downward revision to consumer spending is a potential red flag,” said Claudia Sahm, former Federal Reserve economist. She pointed to cuts in spending on recreation and international travel as evidence of consumer uncertainty.
Adding to the concerns, the Conference Board’s consumer confidence index fell to 93 in June, its lowest reading since the pandemic, with forward-looking sentiment dipping below the recession-warning threshold of 80.
Underlying strength fades
A key measure of economic strength — which strips out volatile components like government spending, inventories, and exports — rose at a 1.9% annual rate in the first quarter, down from 2.9% in Q4 2024. Meanwhile, federal government spending contracted at a 4.6% pace, the steepest drop since 2022.
The data reinforces growing concerns that trade frictions are weighing on economic activity. The widening trade deficit, which mathematically subtracts from GDP, played a key role in dragging down the headline number. Still, economists expect that the import surge is temporary and unlikely to be repeated in the second quarter.
Outlook: A Q2 rebound?
Despite the contraction, many forecasters are optimistic that GDP growth will rebound in the second quarter. FactSet’s survey of economists predicts a 3% bounce for April through June, with the first estimate scheduled for release on July 30.
Still, questions linger over the sustainability of that recovery, particularly as tariffs continue to reshape trade flows and consumer behavior.
