At the beginning of 2025, the U.S. economy faltered, experiencing its first contraction in three years. Faster-than-expected price increases and a dramatic increase in imports caused GDP to fall into negative territory. The first quarter saw a 0.3% annualized decline in the gross domestic product, according to the Bureau of Economic Analysis. Following 2.4% growth in the last quarter of 2024, economists had predicted a 0.2% decline, so that drop was more than they had anticipated. This was the first downturn in the economy since the beginning of 2022.
US Economy Has First Contraction in Three Years
Oxford Economics’ chief U.S. economist, Ryan Sweet, responded to worries in a client note on Wednesday. ““A GDP dip during an expansion phase is rare, but it doesn’t signal a recession,” he said. One of the main causes of the downturn was rising imports. Imports increased at an annualized rate of 41.3% as companies sped up shipments to avoid expected tariffs from the Trump administration. This spike reduced economic output by roughly 5 percentage points because imports deduct GDP.
Domestic demand remained strong in spite of the headline drop. The 3% increase in final sales to domestic buyers was marginally higher than the 2.9% increase observed at the end of 2024. The results of the quarter were influenced by trade activity, according to Gus Faucher, chief economist at PNC Financial Services Group, who spoke to Yahoo Finance. He clarified that “Businesses front-loaded imports ahead of tariffs, which bloated inventories.” “However, consumer spending remained strong, indicating stable underlying demand.”
Impact of Tariffs
Additionally, inflation was higher than anticipated. The core Personal Consumption Expenditures index—excluding food and energy—climbed 3.5% annually, topping forecasts for 3.2% and rising from 2.6% in the previous quarter. Prior to Trump’s tariff hike on April 2, which increased effective rates to levels not seen in more than a century, the report covers the economic environment from January to March. Federal Reserve officials and economists anticipate that those tariffs will hinder future growth and maintain high inflation.“So far, tariffs have clearly hurt the economy,” Faucher said. “And they’re likely to remain a drag through the rest of 2025.”
The weak labor data and economic update caused a sharp reaction in the markets. Private employers only added 62,000 jobs, far less than the 115,000 anticipated, according to ADP’s April report. The news caused investors to sell off. The Nasdaq fell 2.1%, the Dow Jones Industrial Average fell 0.8%, and the S&P 500 fell 1.4%, ending the year’s longest winning streak.
Featured Image Credit: Tima Miroshnichenko; Pexels: Thank You!
