US Economy Contracts for First Time Since 2022 on Imports Surge

(Bloomberg) —

The US economy contracted at the start of the year for the first time since 2022 on a monumental pre-tariffs import surge and more moderate consumer spending, a first snapshot of the ripple effects from President Donald Trump’s trade policy.

Inflation-adjusted gross domestic product decreased an annualized 0.3% in the first quarter, well below average growth of about 3% in the prior two years, according to the government’s initial estimate published Wednesday. 

The data highlight the scramble by companies to secure merchandise ahead of expansive tariffs, with net exports subtracting nearly 5 percentage points from GDP, the most on record, the Bureau of Economic Analysis report showed. A decline in federal spending also weighed on the figure.

Despite the contraction, the underlying details of the report suggest some key drivers of the economy remained on a good footing at the start of the year. Consumer spending — which accounts for two-thirds of GDP — advanced at a 1.8% pace, the weakest since mid-2023 but still better than economists had forecast. A gauge of underlying demand in the economy was solid, helped by the fastest growth in business equipment purchases since 2020.

Separate data out Wednesday showed that inflation-adjusted consumer spending climbed 0.7% last month — more than analysts expected — after an upward revision to the prior month. Meanwhile Federal Reserve’s preferred inflation gauge was unchanged in March, the tamest in almost five years, excluding food and energy.

Trump trade adviser Peter Navarro called the GDP report “the best negative print I have ever seen in my life” in an interview Wednesday with CNBC, saying consumption remained strong and the president’s deregulation efforts would buoy the economy.

The GDP figures showed imports surged an annualized 41.3% — the biggest advance in nearly five years. Because these goods and services aren’t produced in the US, they are subtracted from GDP. Many economists see the sharp widening of the trade deficit reversing in the second quarter, which would support a near-term rebound in growth. 

However, looking further out, forecasters contend that the higher duties will cause a supply shock, challenging businesses and leading to a pullback in demand. Retaliatory tariffs would also discourage exports, setting up a tough backdrop for the rest of the year and making the odds of a recession essentially a coin flip.

“If the blowout on trade was the result of firms pre-buying imported inputs to beat the tariffs, the decay in the trade balance will reverse in Q2. That will generate some GDP growth,” Carl Weinberg, chief economist at High Frequency Economics, said in a note. “However, 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 S&P 500 opened lower and Treasury yields fell. In a social media post, Trump said the US economy will “take a while” to show results of the current policies and blamed the stock market’s performance on his predecessor, Joe Biden.

Indicator	Actual	Estimate
GDP	-0.3%	-0.2%
Personal consumption	+1.8%	+1.2%
PCE price index, excl. food, energy	+3.5%	+3.1%

Typically, imported merchandise moves into warehouses or directly to storefronts. However, the report showed business inventories contributed 2.25 percentage points to GDP during the quarter, the most since the end of 2021. The recent flood imports may instead show up in higher inventories in coming months, which could also provide a lift to second-quarter GDP.

Because swings in trade and inventories can sometimes distort overall GDP, economists prefer looking at final sales to private domestic purchasers for a better snapshot of demand. This measure increased at a 3% pace in the first quarter after rising an annualized 2.9% at the end of 2024.

Growth in consumer spending was driven by a broad-based advance in outlays for services and a pickup in nondurable goods.

Several surveys of consumer attitudes have plunged, raising doubts about the ability of households to provide much fuel for the economy. Low-income consumers are already facing hardships of high prices, while wealthier individuals have been set back by this year’s drop in stock prices.

Meanwhile, business investment in equipment advanced at a 22.5% annualized rate. In addition to a surge in commercial aircraft shipments months after the end of a strike at Boeing Co., output of information processing equipment and computers also jumped.

Economists also see tariffs weighing on capital expenditures, and corporations have acknowledged during the current earnings season that the road ahead for consumers will be challenging.

Retailer Tractor Supply Co. and appliance-maker Whirlpool Corp. are among companies noting that discretionary spending and sales of big-ticket goods have softened more recently. Many executives mentioned the collapse in consumer confidence and the potential for a more-guarded approach to spending.

“It’s difficult to imagine a more tumultuous market backdrop than we’ve experienced over the last couple of months,” Richard Westenberger, chief financial officer and chief operating officer at baby-apparel maker Carter’s Inc., said on the company’s April 25 earnings call.

Government Spending

The GDP report also showed government spending declined at a 1.4% pace, the first decrease since 2022 and restrained by an 8% drop in defense outlays. Trump temporarily paused military aid for Ukraine last month.

Meanwhile, a closely watched measure of underlying inflation accelerated to a 3.5% pace in the first quarter — the most in a year. Detailed data on inflation and consumer spending for the month of March are due later this morning.

The uncertainty over the effect of tariffs on inflation as well as the broader economy has put the Federal Reserve in a tough position. Policymakers have indicated they’re in no rush to lower interest rates until they get further clarity on what the White House policies mean for the economy.

While the Trump administration has implemented a 90-day pause on some of the more punitive tariffs announced earlier this month, the country’s effective tariff rate now stands at almost 23% — the highest in more than a century — according to Bloomberg Economics. Adding to the uncertainty are some exemptions from previously announced higher duties.

The president and his economic advisors see tariffs as a means to stoke economic growth over the longer term through the revival of manufacturing. Trump also hopes to drive export growth and erase deficits with US trading partners, raise revenue for the government and bolster national security.

The government’s monthly jobs report due Friday is projected to show some cooling is underway. A report out Wednesday showed employment at private companies rose a disappointing 62,000 in April, the smallest gain since July, according to ADP Research.

A separate report showed labor costs rose 0.9% in the first quarter, matching the gain at the end of 2024.

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