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New data from the Commerce Department has revealed that the US economy contracted in the first quarter of 2025 for the first time in three years.
Getting into it: According to the data, the US economy shrank at an annualized rate of 0.3% in the first quarter of 2025, marking the first economic contraction since early 2022. One of the biggest contributors was an unprecedented spike in imports, which surged 41.3% — the fastest pace in nearly five years — as companies raced to bring in foreign goods before a new wave of tariffs kicked in under President Trump’s trade agenda. This rush caused net exports to pull back 4.83% from GDP — the largest on record.
Because imports are deducted from GDP calculations, the artificial spike in inbound goods significantly distorted the overall economic picture. Some economists believe this “pull-forward” effect will reverse in the second quarter, potentially leading to a rebound in growth.
Government spending also contributed to the weaker GDP print, falling by 1.4% — the first decline since 2022. This drop was largely attributed to an 8% decrease in defense expenditures following a temporary pause in US military aid to Ukraine.
The Trump administration’s trade strategy, which includes duties on imports from China, Mexico, and Canada, has pushed the effective US tariff rate to nearly 23%, the highest in over a century. While the White House argues these measures will revive domestic manufacturing and reduce trade deficits over time, critics warn they could lead to a prolonged supply shock and increased input costs for US businesses. These costs may (or have already, depending on who you ask) be passed on to consumers, increasing inflation.
Notably, a closely watched measure of core inflation increased to 3.5% in the first quarter — its highest rate in a year. However, the Federal Reserve’s preferred inflation gauge (excluding food and energy) was flat in March.
