The U.S. economy shrank by 0.5% in the first quarter of 2025, between January and March, as two earlier estimates were revised downward by the Commerce Department’s Bureau of Economic Analysis.
Looming fears about the extent of President Donald Trump’s trade war on American trading partners — announced on the so-called “Liberation Day” of April 2 — saw a surge of imports as U.S. companies and households rushed to buy foreign goods before Trump could impose tariffs on them.
The Commerce Department, headed by Secretary Howard Lutnick, previously estimated that the economy fell 0.2% in the first quarter. Economists had forecast no change in the department’s third and final estimate, so the deterioration from earlier data was unexpected.
Gross domestic product (GDP) measures the nation’s output of goods and services, and these are the first figures for Trump’s second term, reversing a 2.4% increase in the last three months of 2024 during the final months of President Joe Biden’s administration.
The data shows that for the first time in three years, the economy contracted — the last time being in the first quarter of 2022.
If the economy contracts for a second consecutive quarter (April through June), then the U.S. will officially be in a recession — preliminary data will be available on July 30.
Consumer spending has slowed sharply, expanding just 0.5%, down from a robust 4% in the fourth quarter of 2024 and a sharp downgrade from the Commerce Department’s previous estimate of 1.2%.
A boost from pre-emptive buying of goods ahead of the imposition of import duties, especially on motor vehicles, faded.
Government spending decreased by 0.6% compared to the prior quarter, with a 4.6% decline in federal spending partially offset by a 2% increase in spending by state and local governments.
In the first quarter of 2025, imports expanded by 37.9%, the fastest growth since 2020, and contributed to a decline in GDP of nearly 4.7 percentage points.
First quarter GDP growth was revised down to -0.5%, a stark drop from the previous quarter's 2.4%. pic.twitter.com/p3zqJbKN3q
— Steven Rattner (@SteveRattner) June 26, 2025
When calculating GDP, imports are subtracted because the metric aims to measure domestic production and spending on goods made domestically, not abroad, whether by businesses or consumers. Including imports would artificially inflate the domestic economy.
Domestic demand growth, a category within the GDP data that measures the economy’s underlying strength, rose at a 1.9% annual rate from January through March. While that's a robust number, it’s down from 2.9% in the fourth quarter of 2024 and from the Commerce Department’s previous estimate of 2.5% growth for the January-March period.
Ryan Sweet of Oxford Economics told the Associated Press that the downgrade in that figure was “troubling,″ though he doesn’t expect to make a significant change to his near-term economic forecast.
If there is any positive news ahead for the Trump administration, it is that the first-quarter surge in imports probably won't happen again in the April-June quarter and therefore shouldn’t impact GDP.
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In fact, economists expect second-quarter growth to bounce back to 3%, according to a survey of forecasters by the data firm FactSet. The Atlanta Federal Reserve is forecasting GDP to accelerate at a 3.4% rate this quarter.
However, given the fluctuations in imports, economists warned against interpreting the expected rebound in GDP as a sign of economic strength. Data on retail sales, the housing market, and the labor market suggest that economic activity is weakening.
Lou Crandall, chief economist at Wrightson ICAP, told Reuters: “The difficulty of accurately capturing the extraordinary foreign-trade and inventory gymnastics that companies undertook to avoid U.S. tariffs created serious measurement challenges that will linger for some time to come.”
Earlier this month, JPMorgan Chase CEO Jamie Dimon warned the U.S. economy may soon “deteriorate.”
“I think there’s a chance real numbers will deteriorate soon,” Dimon said at an industry conference.
He explained that the impacts of pandemic-era government spending and monetary policy, which helped support the economy, have faded, making the country vulnerable to a downturn in the coming months.
Dimon noted a weakening confidence in consumers and business leaders in the wake of the Trump administration’s tariff policies.
Additional reporting by the Associated Press.
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