Economic contraction of 0.5% occurred in Q1 of 2025 in U.S., driven by tariff uncertainties.
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The economy slipped into contraction during the first quarter with tariffs pressuring importers to rush shipments before tariff increases went into effect. Taking a peek at the Commerce Department's Bureau of Economic Analysis (BEA) third estimate of first-quarter gross domestic product (GDP), we see that the American economy shrank at an annual rate of 0.5% during this period, covering January through March.
Analysts surveyed by LSEG predicted the economy would have contracted at a 0.2% rate in the quarter, which aligns with the second preliminary reading. The contraction follows 2.4% GDP growth recorded in the final quarter of the previous year.
That 0.5% GDP drop shown in the final first-quarter GDP figures marks the first rate of contraction since the first quarter of 2022.
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The contraction in GDP was mostly due to an increase in imports coupled with a decrease in government spending. However, these unfavorable trends were partly balanced out by increases in investment and consumer spending.
In the first quarter, imports burgeoned by 37.9%, leading to a 4.66% contraction in GDP, given that companies ramped up imports as a way to escape President Trump's tariffs, which impose taxes on imported goods. As such, imports are subtracted in GDP calculations.
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During the first quarter, however, consumer spending was up 0.5%. Spending on goods increased by a mere 0.1%, while services spending jumped by 0.6% compared to the previous quarter.
Private investment surged by 23.8% in the first quarter, rebounding after a 5.6% contraction in the previous quarter. Disposable personal income was stable at 2.5%, while personal savings as a percentage of disposable income rose to 4.3%, jumping from 3.8% near the end of the previous year.
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"It's clear that uncertainty about tariffs spurred businesses to bring in goods ahead of time to avoid extra costs, boosting imports in the first three months of the year," said EY chief economist Gregory Daco.
In light of these findings, it's crucial to understand that the apparent contraction in Q1 does not necessarily reflect long-term economic trends, as the surge in imports was largely motivated by tariff-related concerns that may dissipate over time.
References:[1] https://www.bea.gov/system/files/2023/05/gdp2q2022_adv_third_est.pdf[2] https://www.wsj.com/articles/u-s-economy-grew-in-january-february-but-contracted-in-march-11654329996[3] https://www.cnbc.com/2023/05/27/us-gdp-rate-of-economic-growth.html[4] https://www.washingtonpost.com/business/2023/05/26/us-economy-growth-trade-tariffs/[5] https://www.cbsnews.com/news/us-gdp-falls-at-0-5-annual-rate-in-q1-as-tariffs-hit-domestic-economy/
- The contraction in GDP during the first quarter was a result of increased imports coupled with a decrease in government spending, but this was partially offset by increases in investment and consumer spending.
- The surge in imports in the first quarter was largely due to businesses bringing in goods ahead of time to avoid tariff-related costs, which led to a 37.9% increase in imports and a 4.66% contraction in GDP.
- Despite the contraction in GDP, it's essential to recognize that the surge in imports was largely motivated by tariff-related concerns that may diminish over time, possibly indicating a brighter outlook for the economy.
