Economists Are Now on Alert Following Q1 ‘Shrinking’ Economy Data

The U.S. economy shrank at an annualized rate of 0.5% in the first quarter of 2025, marking the first contraction in three years and a significant downgrade from earlier estimates, according to the Commerce Department’s third and final estimate released on June 26, 2025.

This downturn, driven largely by President Donald Trump’s aggressive tariff policies, has heightened fears of a potential recession as businesses and consumers grapple with trade disruptions and rising prices.

The primary driver of the economic contraction was a massive 37.9% surge in imports—the fastest pace since 2020—which subtracted nearly 4.7 percentage points from GDP growth.

Businesses and households rushed to stockpile foreign goods in anticipation of Trump’s sweeping tariffs, which include a 10% universal tariff on most countries and a 145% levy on Chinese imports.

This preemptive buying spree, intended to mitigate the impact of higher import costs, distorted trade flows and significantly reduced GDP, as imports are subtracted from the calculation of domestic production.

Consumer spending, which accounts for roughly two-thirds of U.S. economic activity, also slowed sharply, growing at just 0.5% annually compared to 4% in the fourth quarter of 2024.

Federal government spending plummeted by 4.6%, the largest drop since 2022, partly due to cuts driven by the Trump administration’s “Department of Government Efficiency” led by Elon Musk.

These factors compounded the economic slowdown, reversing the robust 2.4% growth recorded in the final quarter of 2024.

Related: Economy News: US Retail Sales Now Plummet in Latest Trend

Underlying Economic Strength Persists, But Uncertainty Looms

Despite the headline contraction, a key measure of the economy’s underlying strength—real final sales to private domestic purchasers, which includes consumer spending and private investment but excludes volatile components like trade and government spending—grew at a solid 1.9% annual rate.

While this figure is down from 2.9% in Q4 2024, it suggests that core economic activity remained resilient in early 2025.

Business investment also surged by 24.4%, driven by companies stockpiling equipment and inventories ahead of tariff implementation.

However, economists warn that this resilience may be short-lived.

The Congressional Budget Office (CBO) projects that Trump’s tariffs will reduce GDP by 0.6% over a decade, increase inflation, and shrink household purchasing power, even as they generate $2.8 trillion in deficit reduction through tariff revenues.

The Penn-Wharton Budget Model estimates a more severe long-term impact, predicting a 6% reduction in GDP and a 5% drop in wages due to sustained trade barriers.

Carl Weinberg, chief economist at High Frequency Economics, noted, “Corrosive uncertainty and higher taxes—tariffs are a tax on imports—will drag GDP growth back into the red by the end of this year.”

The erratic rollout of tariffs, including frequent escalations and partial reversals, has paralyzed business planning, with many companies halting hiring and investment.

President Trump has defended his tariff policies, arguing they will protect American industries and attract manufacturing back to the U.S.

In a Truth Social post on April 30, 2025, he dismissed the GDP contraction as a “Biden overhang,” claiming that tariffs would soon spark an economic boom.

However, critics, including Democratic Senator Elizabeth Warren, have blamed Trump’s “red-light, green-light tariffs” for disrupting years of steady growth.

The administration’s trade policies have been marked by volatility.

In April, Trump imposed a 10% universal tariff and a 145% tariff on Chinese goods, only to pause reciprocal tariffs on other nations for 90 days.

More recently, he doubled tariffs on steel and aluminum to 50%, a move expected to further increase consumer prices.

A federal court ruling on May 28, 2025, blocked some of these tariffs, citing overreach under the International Emergency Economic Powers Act, adding to the uncertainty.

The economic fallout is already evident.

Payroll provider ADP reported just 62,000 jobs added in April 2025, half the expected amount, signaling caution among businesses.

The Business Roundtable’s CEO survey indicated a sharp decline in hiring plans, and job openings fell to 7.2 million in March, the lowest since late 2020.

Consumer confidence has also plummeted, with an April 2025 index dropping 32% to its lowest level since the 1990 recession, driven by fears of tariff-induced price hikes.

Also Read: Two Tech Titans Now Announce Massive Layoffs Amid AI Adoption

Inflation and Recession Fears Mount

The Federal Reserve faces a dilemma as inflation pressures rise.

The Personal Consumption Expenditures (PCE) price index, the Fed’s preferred gauge, increased to 2.3% in March 2025, down from 2.5% in February but still above the 2% target.

Economists warn that prolonged tariffs will force businesses to pass higher costs to consumers, potentially fueling stagflation—a combination of stagnant growth and rising prices.

Ryan Sweet of Oxford Economics noted, “The economy was essentially stagnant in the first three months of the year while growth in headline and core inflation accelerated, fanning concerns of stagflation.”

The International Monetary Fund has downgraded U.S. growth forecasts for 2025, citing tariffs as a primary drag on global and domestic economies.

Some analysts suggest that the Q1 GDP contraction may be followed by a temporary rebound in Q2, as the import surge subsides and tariffs reduce trade flows.

JP Morgan economists noted, “If imports collapse in coming months, there will be a temporary bounceback in measured GDP in Q2.”

However, sustained tariffs and retaliatory measures from trading partners, particularly China, could deepen the slowdown.

The Labor Department’s upcoming jobs report and the Commerce Department’s first look at Q2 GDP on July 30, 2025, will provide critical insights.

As Trump’s tariff policies continue to reshape the economic landscape, the U.S. stands at a crossroads.

While the administration touts tariffs as a tool to bolster domestic industry, the immediate costs—higher prices, reduced growth, and rising uncertainty—are testing the resilience of businesses and consumers alike.

With recession fears mounting, the coming months will determine whether Trump’s trade agenda delivers the promised “golden age” or pushes the economy further into uncharted territory.

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