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First-quarter GDP contracted 0.3%. Imports surged, which detracts from the GDP numbers, as businesses and retailers sought to rush in imported goods ahead of threatened tariffs. The rise in imports subtracted five percentage points from first-quarter growth. This was partially counterbalanced by a three-point contribution by extra business spending on equipment and inventories.
The more moderate growth in consumer spending in the first quarter indicates that consumers had already begun pulling back somewhat even before the tariffs took effect, though large snowstorms in January and February may have played a role in that, too. The first-quarter GDP contraction would have been about 0.2 percentage points worse if not for a surge in car buying in March, ad of the April 2 effective date for the auto import tariff.
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Storm clouds will loom over the economy as the year progresses. The trade war, if it is sustained, will hurt U.S. exports and could extinguish the recent revival in manufacturing. Consumer sentiment has dropped significantly, though much more so among Democrats and independents than among Republicans. The Trump administration has not only been cutting federal employees, but also canceling contracts that sustain government contractors and nonprofits. The ripple effect of canceled contracts beyond government agencies is unknown, but potentially high. Uncertainty is also likely to hurt business spending on equipment and hiring. Consumers may save more if they feel insecure about their jobs going forward. Foreign tourism is likely to be down as well, perhaps subtracting a tenth of a percentage point from GDP growth.
2025 GDP growth is likely to slow to a 1.5% pace or worse, down from 2.8% in 2024. Even without a trade war, the economy was likely to cool off. Consumer income growth was expected to be tempered by both fewer job gains this year and a stock market that was due for a breather after nearly 25% gains in each of the previous two years. With the market down about 10% from its February peak at the time of this writing, spending on big-ticket items like cars and renovation projects is likely to take a hit.
Source: Department of Commerce: GDP Data
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