In a surprise drop from its earlier assessment, the Commerce Department said that the US economy contracted at an annual rate of 0.5 percent between January and March due to business disruptions caused by President Donald Trump's trade battles.

A spike in imports caused first-quarter growth to plummet as American businesses hurried to import goods before Trump could implement tariffs.

According to earlier estimates from the Commerce Department, the economy shrank by 0.2 percent during the first quarter.

Economists had predicted that the department's third and final estimate would remain unchanged.

The country's output of goods and services, or gross domestic product, fell from January to March, marking the first contraction in the economy in three years and reversing a 2.4 percent growth in the last three months of 2024.

The GDP shrank by over 4.7 percentage points as a result of imports, which grew 37.9 percent, the fastest since 2020.

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Additionally, consumer spending slowed significantly, growing by just 0.5 percent as opposed to a strong four percent in the fourth quarter of 2024 and a significant drop from the Commerce Department's earlier projection.

 

A GDP data category that gauges the fundamental health of the economy grew at an annual pace of 1.9 percent from January to March, compared to 2.9 percent in the fourth quarter of 2024. Consumer expenditure and private investment are included in this category, although volatile factors like exports, inventories, and government spending are not.

Additionally, the largest decline in federal government spending since 2022 occurred at an annual rate of 4.6 percent.

GDP is lowered by trade deficits. However, that is merely a mathematical issue. GDP is solely meant to include domestically produced goods, not imported goods. Therefore, imports must be deducted in order to prevent them from inflating domestic production, even though they appear in the GDP report as consumer expenditure or company investment.

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Since the import inflow from the first quarter is probably not going to occur again in the April–June quarter, it shouldn't have an impact on GDP. In fact, a survey of forecasts conducted by the data firm FactSet indicates that experts anticipate second-quarter GDP to rebound to three percent in the second quarter.