The U.S. economy contracted in the first quarter of 2025, thanks in part to a massive increase in imports as retailers tried to get ahead of looming tariffs on foreign goods.
The U.S. gross domestic product (GDP), which is the total of all goods and services produced in the U.S., was down at an annualized rate of 0.3% in the first quarter, according to the U.S. Bureau of Economic Analysis (BEA). The GDP for the fourth quarter of 2024 was 2.4%.
The GDP news was part of a flurry of economic data released Wednesday morning that offered a contradictory view of the overall economy and possibly some initial reactions to tariffs and federal government job cuts.
The BEA reported that the fall in GDP was primarily the result of the increase in imports, which are a subtraction in the calculation of GDP. Imports were up 41.3% for the quarter, including a 50.9% increase in foreign goods. The surprisingly high imports were believed to be the result of retailers trying to bring in as many products as possible before tariffs on foreign goods took effect in early April. U.S. exports also were up, rising 1.8%.
While the GDP decline was a surprise for most economists, the impact was blunted somewhat by the fact that the level of imports is expected to drop quickly and will not be such a drag on the overall GDP in the second quarter.
A bigger concern may be a slowdown in consumer spending and the reduction in federal spending seen in the first quarter. Consumer spending, which has a major impact on the economy, continued to grow, but at a much slower rate during the quarter, with personal consumption expenditures increasing by 1.8%. That rate was down from the 4% gain in the fourth quarter of 2024 and the slowest gain since the second quarter of 2023, according to CNBC.
Federal government spending fell 5.1% during the quarter, which also reduced GDP. At the same time, there was an increase in investment, and exports helped reduce the downward slide of the GDP. Even the minor rise in consumer spending helped cut the GDP losses.
One more piece to this increasingly complex economic picture was that the personal consumption expenditures (PCE) price index, one of the Federal Reserve’s top gauges of inflation, increased 3.6% in the first quarter, up from 2.4% in the fourth quarter. Excluding food and energy prices, the PCE still jumped 3.5%, compared to 2.6% in the fourth quarter of 2024.
Economists weigh in
Wells Fargo economists Tom Quinlan and Shannon Grein wrote Wednesday morning that the U.S. economy is at a greater risk of recession now than it was a month ago, but this 0.3% GDP contraction in first quarter is not the start of one. It reflects instead the sudden change in trade policy that culminated in the biggest drag from net exports in data going back more than a half-century.
They estimate that trade lopped 4.8% off of first-quarter growth. It is rare for a drag that large to come from a comparatively small component of GDP such as net exports. In fact, they claim you have to go back to the late 1940s to find an equivalent impact. The first quarter import surge was not because trade activity was grinding to a halt, but rather because imports shot up as firms tried to pull forward needed industrial supplies and retailers stocked their shelves with consumer goods.
“In a nutshell, tariff disruption introduced a lot of noise into the headline Q1 growth number. The question is for how long consumers and businesses can withstand uncertainty,” Quinlan and Brein wrote. “If Q1 growth was influenced by a pull-forward in demand to get ahead of tariffs, to what extent should we brace for a hangover effect in Q2? Consumer and business optimism has tumbled as fear of inflation and recession permeate the economic environment.”
Mike Fratantoni, senior vice president and chief economist at the Mortgage Bankers Association, said the data showed a slower growth rate for consumer spending, with a reduction in spending on motor vehicles and parts compared to last quarter. Households were getting more cautious with respect to larger purchases even in advance of the tariff announcements.
“The quandary facing the Federal Reserve is that while the trend in the data is clearly showing a slowing economy, it also renewed upward pressure on inflation,” said Fratantoni. “We expect that the Fed will hold rates steady at its meeting next week and will indicate that it will continue to hold at this level until it becomes clear whether a recession or inflation is the bigger risk.”
