US Economy Contracts for the First Time Since 2022 Due to Surge in Imports

The US economy saw a contraction at the start of the year for the first time since 2022, influenced by a notable increase in imports prior to tariffs and a decline in consumer spending, highlighting the early effects of President Donald Trump’s trade policies.

Based on the government’s preliminary estimate released on Wednesday, inflation-adjusted gross domestic product (GDP) decreased at an annualized rate of 0.3% in the first quarter, significantly lower than the average growth of around 3% seen over the past two years.

Net exports reduced GDP by nearly 5 percentage points, the largest recorded decline, as detailed in the Bureau of Economic Analysis report. This information emphasizes the urgency among businesses to secure goods ahead of forthcoming tariffs.

Consumer spending, making up two-thirds of GDP, rose by 1.8%, marking the slowest growth since mid-2023, yet this figure still surpassed economists’ predictions. A measure indicating underlying demand in the economy remains strong, buoyed by the fastest increase in business equipment purchases since 2020.

Following the publication of these figures, stock futures continued to decline, while Treasury yields increased.

Current estimates suggest nearly equal chances of the US entering a recession within the next year. Looking ahead, many economists expect the increased tariffs to create a supply shock, exerting pressure on businesses and leading to decreased demand. Consumers are growing increasingly concerned that tariffs will negatively influence the labor market and raise living costs.

The latest GDP data displays an impressive 41.3% increase in imports, representing the largest growth in nearly five years. Since these imported goods aren’t produced domestically, they are subtracted from GDP calculations. Economists forecast that the considerable widening of the trade deficit will begin to reverse in the second quarter.

Generally, imported goods are either stored in warehouses or delivered directly to retail locations. Nevertheless, the report showed that business inventories added 2.25 percentage points to GDP for the quarter, the highest since late 2021. The recent surge in imports may instead lead to higher inventories in the upcoming months, potentially enhancing second-quarter GDP when paired with a narrowing trade deficit.

To avoid inaccuracies in overall GDP due to trade and inventory fluctuations, economists prefer examining final sales to private domestic consumers for a clearer demand picture. This measure expanded at a 3% rate in the first quarter, following a 2.9% annualized increase at the end of 2024.

The rise in consumer spending was driven by a widespread increase in service expenditures and a rebound in non-durable goods.

Recent surveys about consumer sentiment have significantly declined, raising concerns over households’ ability to sustain economic growth. Low-income consumers are feeling the strain from high prices, while wealthier individuals have been negatively impacted by this year’s drop in stock values.

At the same time, business investment in equipment rose at an annualized rate of 22.5%, partly due to a surge in commercial aircraft shipments following the end of a strike at Boeing Co., along with a substantial rise in the production of information processing equipment and computers.

Economists warn that tariffs may hinder capital expenditures, and during the current earnings season, companies have recognized that future consumer conditions are likely to be challenging.

Companies such as Tractor Supply Co. and Whirlpool Corp. have noted a recent drop in discretionary spending and luxury item sales. Many executives have pointed to a downturn in consumer confidence and the likelihood of more cautious spending patterns.

“It’s hard to envision a more turbulent market environment than what we’ve experienced in the past couple of months,” stated Richard Westenberger, CFO and COO of baby-apparel manufacturer Carter’s Inc., during the company’s earnings call on April 25.

The GDP report also highlighted that a closely tracked measure of core inflation accelerated to a rate of 3.5% in the first quarter—its highest level in a year. Detailed inflation and consumer spending data for March is expected later today.

The uncertainty regarding the effects of tariffs on inflation and the broader economy has placed the Federal Reserve in a challenging position. Policymakers have conveyed that they are not rushing to lower interest rates until they gain more insight into the implications of White House policies for the economy.

Although the Trump administration has implemented a 90-day halt on some of the more severe tariffs announced earlier this month, the country’s effective tariff rate is currently nearly 23%—the highest in over a century, according to Bloomberg Economics. Complicating matters are exceptions from previously stated higher duties.

The president and his economic advisors view tariffs as a means to encourage long-term economic growth by revitalizing the manufacturing sector. Trump also intends to boost export growth, eliminate trade deficits with US partners, increase government revenue, and enhance national security.

The government’s monthly jobs report due on Friday is expected to showcase signs of cooling in the labor market. A report released on Wednesday indicated that employment at private companies grew by a disappointing 62,000 in April, the smallest increase since July, according to ADP Research.

Additionally, a separate report indicated that labor costs rose by 0.9% in the first quarter, equating to the increase at the end of 2024.

© 2025 Bloomberg

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