The US economy shrank by 0.5% in the first quarter of 2025, mainly because of President Donald Trump’s trade war. The Commerce Department said this drop was worse than expected—the earlier estimate was only a 0.2% decline.
Trump’s tariff plans caused businesses to rush and import goods before the new taxes kicked in. This led to a massive 37.9% jump in imports—the highest since 2020. But instead of helping the economy, it hurt it. That’s because imports are not counted in the GDP (Gross Domestic Product and must be subtracted. This large spike in imports pulled the GDP down by 4.7 percentage points.
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This is the first time in three years that the US economy has seen a quarterly decline. In the last quarter of 2024, the economy had grown by 2.4%.
Consumer spending, a major part of the economy, also dropped sharply. It grew by only 0.5% this quarter, compared to 4% in the previous one.
A core part of the economy—which includes consumer spending and private investment but excludes exports, government spending, and inventory changes—grew at 1.9%, down from 2.9% at the end of 2024.
Even government spending slowed down. The federal government’s spending dropped by 4.6%, the largest drop since 2022.
Why Did Imports Reduce GDP?
GDP counts only goods and services made inside the country. So, when people or companies buy imported goods, they are first counted in spending—but later subtracted since they weren’t made in the US. That’s why a large increase in imports can make GDP appear lower.
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Economists think this decline is temporary. Since the import surge was likely a one-time event, they expect the economy to bounce back in the second quarter (April–June). A FactSet survey predicts the GDP will grow by 3% during that period.
The official report for the second-quarter GDP will be released on July 30.
