The U.S. economy shrank in the first quarter despite underlying strength in consumer spending and business investment.
Gross domestic product contracted at an annualized rate of 0.3 percent, the Department of Commerce said on Wednesday, as businesses rushed to bring in goods ahead of anticipated tariff hikes.
The decline in GDP marks a sharp reversal from the 2.4 percent growth rate recorded at the end of last year. This was the slowest rate of growth since 2022, when the economy avoided an official recession but contracted for two consecutive quarters.
Final sales to private domestic purchasers, a closely watched measure of business and consumer health that is seen as a better predictor of future growth, expanded at a healthy pace of three percent. That’s an acceleration from the fourth quarter of 2024’s 2.9 percent growth rate. After-tax personal income rose 2.7 percent, up from 1.9 percent and the strongest increase since the first quarter of last year.
Consumer spending rose 1.8 percent, the slowest rate since the first quarter of last year. Spending on durable goods fell while consumer spending on nondurables and services increased at a slower pace than the end of last year.
The contraction in overall GDP was driven by a widening trade gap, as imports surged ahead of new tariffs announced by the Trump administration as part of its efforts to reshape global trade and put the U.S. economy on a more sustainable path. Imports rose at a 41.3 percent annualized rate in the first quarter, including a 50.9 percent increase in imported goods.
In addition, government spending contracted. Federal government spending shrank at a 5.1 percent rate, the largest decline since pandemic support spending began to wind down in 2022. Defense spending fell at an eight percent rate and non-defense shrank one percent. State and local spending grew 0.8 percent, the lowest since the second quarter of 2022.
Also, the January through March period was marked by wildfires in California and unusually harsh winter weather in the South and elsewhere.
Economists had forecast a growth rate of 0.4 percent. But those projections were largely made before trade data released this week suggested even lower growth. Imports surged 5.0 percent in March, led by a 27.5 percent spike in consumer goods, a 6.6 percent rise in vehicles, and a 3.8 percent gain in capital goods. Exports, by contrast, edged up just 1.2 percent. The trade deficit ballooned to $162.0 billion from February’s $147.8 billion.
More recent forecasts had the economy shrinking around 0.2 percent.
Under the government’s formula for calculating GDP—consumption plus investment plus government spending plus net exports—imports are a drag on growth. A surge in imports deepens the negative net export figure, subtracting from GDP even if those goods are headed for eager American consumers. The result: strong domestic demand or businesses rushing to import goods ahead of new tariffs can translate into weaker GDP growth.
Private sector investment surged at the start of the year, likely also reflecting businesses front-running anticipated import duties. Overall, investment rose 21.9 percent, driven by a 22.5 percent increase in equipment investment. Investment in intellectual property—a category less likely to be affected by tariffs—rose at a 4.1 percent pace. Business investment, which excludes residential investment, grew 9.8 percent.
The personal consumption price index, a measure of inflation closely watched by the Federal Reserve, rose at a 3.6 percent annualized rate, up from 2.4 percent at the end of last year. Core prices—a metric which excludes food and energy—rose at a 3.5 percent rate, an acceleration from the previous quarter’s 2.6 percent rate.
GDP growth is reported after adjusting for inflation. Before adjusting for changes to the price level, the economy grew at a 3.5 percent annualized rate, a decline from the 4.8 percent rate in the fourth quarter.
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