U.S. economy shrinks in early 2025 as tariffs weaken growth

As companies rushed to stay ahead of President Trump’s expansive new tariffs, the U.S. economy shrank in the first quarter of 2025 due to a spike in imports and indications of waning consumer demand.

US Economy Shrank in Early 2025

According to the Commerce Department, the economy shrank for the first time since early 2022, with an annualized 0.3% drop in inflation-adjusted GDP from January to March. Many economists had predicted modest growth, so the downturn came as a surprise to them. It also hinted at a turbulent start to the year as a new administration changed trade policy. Imports reached their highest levels since the pandemic-era recovery in late 2020 as businesses rushed to stockpile goods before tariffs took effect. Net exports, or exports less imports, dropped by almost five percentage points from the GDP total as a result of that spike, the biggest single-quarter drag since 1947.

Although still increasing, consumer spending grew at its slowest rate since mid-2023, at a modest 1.8% pace. Meanwhile, the newly created Department of Government Efficiency cut staff and contracts, resulting in a decline in federal spending. Together, these patterns slowed overall growth.

Economists offered mixed reactions. Shannon Grein of Wells Fargo noted, “The numbers may exaggerate the weakness. Much of the import activity was a one-time surge to beat tariffs. Underlying demand remains fairly steady.” In fact, private domestic final sales, which exclude fluctuations in government, trade, and inventory, increased by 3% in the first quarter, marginally surpassing the 2.9% rate in late 2024. Businesses also invested more, increasing their expenditures on inventory and equipment.

Market Sentiment Decreases

Market sentiment deteriorated despite these indications of resilience. Following the underwhelming release of the GDP data on Wednesday, stocks fell, with the S&P 500 and Nasdaq recording their worst quarterly results since 2020. As tariff announcements shake supply chains and consumer confidence, investors continue to exercise caution.

In response to market anxiety, President Trump blamed his predecessor.“This is Biden’s stock market, not mine,” he wrote on Truth Social. However, former White House economist Jared Bernstein fired back, saying Trump’s trade agenda clearly weighed on growth: “These numbers have Trump’s tariffs written all over them.”

Large corporations with more uncertain outlooks, such as American Airlines, PepsiCo, and General Motors, expressed concerns about the policy volatility. Some even manipulated profit projections, such as GM. Economists caution that tariffs could quickly undo the apparent decrease in inflation seen in March. The central bank may find itself in a challenging position as it attempts to strike a balance between controlling inflation and preserving jobs, according to Fed Chair Jerome Powell, who acknowledged the conundrum.

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