U.S. economy contracted 0.3% in Q1: import surge before tariffs drags down GDP
Commerce Department data released Wednesday show Q1 GDP contracted at an annual rate of 0.3%, as companies significantly increased imports before tariffs were announced in April. Consumer spending growth slowed to 1.8%, the lowest since Q2 2023. The core PCE price index rose 3.5%, well above the Fed's 2% target. Economists warn that if tariffs persist, the economy could stall or even slip into recession.
Key Points
- The economy contracted at an annualized rate of 0.3% in the first quarter, according to data released by the U.S. Commerce Department on Wednesday, as businesses sharply increased imports ahead of tariffs announced in early April.
- Consumer spending grew 1.8% in the first quarter, the slowest pace since the second quarter of 2023, with recent surveys showing households' confidence in economic growth, employment, and inflation prospects has declined.
- Oliver Allen, senior U.S. economist at Pantheon Macroeconomics, said consumer spending in the current quarter will be "dragged down by damaged confidence and high prices squeezing real incomes, while extreme uncertainty will freeze business investment, and exports—especially to China—will suffer."
Deeper Analysis
U.S. companies rushed to stock up on foreign goods last quarter in response to sweeping import tariffs announced by President Donald Trump on April 2—including a 10% baseline tariff on dozens of trading partners and a 145% tariff on Chinese goods. Trump set a 90-day pause on the high reciprocal tariffs on April 9.
Allen said in a note to clients: "If current tariffs remain unchanged, a period of stagnation is likely ahead; if the reciprocal tariffs are fully implemented in July, a recession is the most likely outcome." He expects GDP growth to slow to below 1% on an annualized basis by the fourth quarter.
In another discouraging economic data point, the core Personal Consumption Expenditures (PCE) price index, which excludes volatile food and energy prices, rose 3.5% in the first quarter, well above the Federal Reserve's 2% target. The Commerce Department said the core PCE was unchanged month-over-month last month.
Trump, who took office on January 20, has blamed negative economic news on former President Joe Biden.
"Our country will prosper, but we must get rid of Biden's 'leftover burden.' It takes time, and it has nothing to do with tariffs—he just left us with bad numbers. But when prosperity begins, it will be unprecedented. Please be patient!!!" Trump said on social media on Wednesday.
Consumers account for about 70% of economic growth, and their expectations bode poorly for the GDP outlook. The Conference Board's measure of household expectations fell to a 13-year low this month.
"All three expectation components—business conditions, employment outlook, and future income—deteriorated sharply, reflecting a broadly pessimistic sentiment about the future," Stephanie Guichard, senior economist for global indicators at the Conference Board, said in a statement on Tuesday.
Guichard noted that the proportion of consumers expecting fewer job openings in the next six months rose to 32.1%, nearly matching the level during the Great Recession in April 2009. Additionally, expectations for future income turned negative for the first time in five years.
These data align with survey results released by the University of Michigan on Friday.
Hit by high tariffs, consumer expectations fell 32% in the year through April, the largest decline since the 1990 recession. The university said one-year inflation expectations rose to 6.5% from 5% last month, the highest level since double-digit inflation in 1981.