WASHINGTON: The U.S. economy shrank at an annual rate of 0.3% in the first quarter of 2025, marking the first contraction in three years. Economists largely blame President Donald Trump’s trade policies, particularly his aggressive tariffs, for disrupting business activity.
A major drag came from a 41% surge in imports — the fastest pace since 2020 — as businesses rushed to bring in foreign goods before new tariffs took effect. That surge alone shaved 5 percentage points off GDP growth.
At the same time, consumer spending slowed sharply to 1.8% (down from 4% in Q4 2024), and federal government spending dropped 5.1%.
This downturn follows a 2.4% expansion in the last quarter of 2024. Analysts had expected a modest 0.8% gain, but many were bracing for a potential decline. Financial markets reacted quickly: the Dow fell 400 points, while the S&P 500 dropped 1.5% and the Nasdaq fell 2%.
However, not all indicators were negative. A key measure of the economy’s underlying strength — which excludes trade, inventory changes, and government spending — grew at a healthy 3% annual rate, slightly up from 2.9% in the previous quarter.
Still, concerns are mounting. Core inflation rose to 3.5%, well above the Federal Reserve’s 2% target. The Fed now faces a difficult choice: cut interest rates to support growth, or keep them high to fight inflation. Ryan Sweet of Oxford Economics said the economy appears to be entering a period of stagflation — where growth stagnates while inflation remains high.
Economists warn that Trump’s trade policies, particularly his 145% tariffs on Chinese goods, may further strain the economy later this year. Carl Weinberg of High Frequency Economics predicts GDP could slip into negative territory again in the second half of 2025.
Democrats were quick to point fingers. Senator Elizabeth Warren said Trump's unpredictable tariffs have “shrunk the economy,” accusing businesses of panic-buying imports ahead of what she called “tariff doomsday.”
There are also signs the strong job market may be weakening. Payroll company ADP reported just 62,000 new jobs in April, far below expectations and down from 147,000 in March. The drop affected several industries, including tech, healthcare, and professional services.
“Unease is the word of the day,” said Nela Richardson, ADP’s chief economist. “It’s hard for companies to make hiring decisions in such an uncertain environment.”