US economy shrinks 0.5% in Q1 as import surge, Trump’s tariff threats weigh on growth

The US economy contracted at a 0.5% annualised rate in the January-March quarter, according to revised data released Thursday by the Commerce Department, as President Donald Trump’s trade policies triggered a surge in imports that disrupted domestic production.

The latest estimate marks a sharp downgrade from the earlier figure of a 0.2% contraction and underscores how tariff uncertainty weighed on economic activity. It was the first quarterly contraction in three years and a significant reversal from the 2.4% growth seen in the final quarter of 2024.

The January-March drop in gross domestic product, the nation’s output of goods and services — reversed a 2.4% increase in the last three months of 2024 and marked the first time in three years that the economy contracted. Imports expanded 37.9%, fastest since 2020, and pushed GDP down by nearly 4.7 percentage points. Consumer spending also slowed sharply.

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And federal government spending fell at a 4.6% annual pace, the biggest drop since 1986.

While Trump has backed off or postponed some of his most punishing trade salvos as trade negotiations are ongoing, a July deadline approaches for higher tariff levels to kick in for dozens of economies – adding to uncertainty in the economy.

Trade deficits reduce GDP. But that’s just a matter of mathematics. GDP is supposed to count only what’s produced domestically, not stuff that comes in from abroad. So imports — which show up in the GDP report as consumer spending or business investment — have to be subtracted out to keep them from artificially inflating domestic production.

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The first-quarter import influx likely won’t be repeated in the April-June quarter and therefore shouldn’t weigh on GDP. In fact, economists expect second-quarter growth to bounce back to 3% in the second quarter, according to a survey of forecasters by the data firm FactSet.

Thursday’s report was the Commerce Department’s third and final report on first-quarter growth. The first look at April-June GDP growth is due July 30.

With inputs from agencies