US economy shrinks 0.3% in first quarter as Trump trade wars disrupt businesses

The US economy shrank at a 0.3% annual pace from January through March, the first drop in three years, as President Donald Trump’s trade wars disrupted business. First-quarter growth was slowed by a surge in imports as companies in the United States sought to bring in foreign goods before Trump imposed massive tariffs.  

The January-March decline in gross domestic product—the nation’s output of goods and services—reversed a 2.4% gain in the last three months of 2024. Imports grew at a 41% pace, the fastest since 2020, and reduced first-quarter growth by five percentage points. Consumer spending also slowed sharply to 1.8% growth from 4% in October-December last year. Federal government spending plunged by 5.1% in the first quarter.  

Forecasters surveyed by the data firm FactSet had, on average, expected the economy to eke out 0.8% growth in the first quarter, but many anticipated a GDP contraction.  

Financial markets sank following the report. The Dow Jones dropped 400 points at the opening bell shortly after the GDP figures were released. The S&P 500 fell by 1.5%, and the Nasdaq composite declined by 2%.

The surge in imports—the fastest since 1972, excluding COVID-19 economic disruptions—is expected to reverse in the second quarter, removing pressure on GDP. For that reason, Paul Ashworth of Capital Economics forecasts that April-June growth will rebound to a 2% increase.  

Trade deficits reduce GDP, but that is primarily a matter of calculation. GDP is intended to measure only domestic production. Therefore, imports, which the government counts as consumer spending when, for example, Swiss chocolates are purchased, must be subtracted to prevent artificial inflation of domestic production.  

Other aspects of Wednesday’s GDP report indicated that the economy remained solid at the start of the year.  

A category within the GDP data that measures the economy’s underlying strength rose at an annual rate of 3% from January through March, up from 2.9% in the fourth quarter of 2024. This category includes consumer spending and private investment but excludes volatile factors such as exports, inventories, and government spending.  

Still, many economists argue that Trump’s extensive import tariffs and the inconsistent manner in which they have been implemented will hinder growth in the second half of the year and increase the risk of a recession.  

“We think the downturn of the economy will get worse in the second half of this year,” wrote Carl Weinberg, chief economist at High Frequency Economics. “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.”  

Wednesday’s report also highlighted rising prices, which may concern the Federal Reserve, as it continues efforts to cool inflation following a severe post-pandemic surge. The Fed’s preferred inflation measure, the personal consumption expenditures (PCE) price index, rose at an annual rate of 3.6%, up from 2.4% in the fourth quarter. Excluding volatile food and energy prices, core PCE inflation registered 3.5%, compared with 2.6% in October-December. The central bank aims for a 2% inflation rate.  

The first-quarter GDP figures “highlight the bind that the Federal Reserve is in,” Ryan Sweet of Oxford Economics wrote in a commentary. The Fed must decide whether to cut interest rates to support economic growth or maintain high rates due to persistent inflation. “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.”  

Trump inherited a stable economy that had grown steadily despite high interest rates imposed by the Fed in 2022 and 2023 to combat inflation. His unpredictable trade policies—including 145% tariffs on China—have unsettled businesses and raised concerns about increasing consumer prices.  

Democrats swiftly blamed Trump for disrupting several years of economic growth. Democratic Senator Elizabeth Warren of Massachusetts said: “100 days into his presidency, Donald Trump’s red-light, green-light tariffs are shrinking our economy, with businesses stockpiling imports in anticipation of tariff doomsday.”  

Emerging evidence suggests that the strong labour market, a pillar of the US economy during the pandemic recession, may be weakening.  

On Wednesday, payroll provider ADP reported that companies added just 62,000 jobs in April, about half of what was expected and down from 147,000 in March. This could indicate that businesses are adopting a more cautious approach to hiring amid uncertainty over tariffs. However, the ADP figures often differ from the official government jobs report, which is due on Friday.  

Employers in the education and health, information technology, and business and professional services sectors all cut jobs. Business and professional services encompass industries such as engineering, accounting, and advertising.  

“Unease is the word of the day,” said Nela Richardson, chief economist at ADP. “It can be difficult to make hiring decisions in such an environment.” 

By RSS/AP