U.S. economy shrank 0.5% between January and March

The U.S. economy shrank at a 0.5% annual pace from January through March as President Trump’s trade wars disrupted business, the Commerce Department reported Thursday in an unexpected downgrade from its previous estimate.

First-quarter growth sank under a surge of imports as companies in the United States rushed to bring in foreign goods before Trump could impose tariffs on them. The Commerce Department previously estimated that the economy fell 0.2% in the first quarter. Economists had forecast no change in the department’s third and final estimate.

The January-March drop in gross domestic product — the nation’s output of goods and services — reversed a 2.4% increase in the last three months of 2024 and marked the first time in three years that the economy contracted. Imports expanded 37.9%, fastest since 2020, and pushed GDP down by nearly 4.7 percentage points.

Consumer spending also slowed sharply, expanding just 0.5%, down from a robust 4% in fourth-quarter 2024 and a sharp downgrade from the Commerce Department’s previous estimate.

A category within the GDP data that measures the economy’s underlying strength rose at a 1.9% annual rate from January through March, down from 2.9% in the fourth quarter of 2024. This category includes consumer spending and private investment but excludes volatile items like exports, inventories and government spending.

And federal government spending fell at a 4.6% annual pace, the biggest drop since 2022.

Trade deficits reduce GDP. But that’s just a matter of mathematics. GDP is supposed to count only what’s produced domestically, not what comes in from abroad. So imports — which show up in the GDP report as consumer spending or business investment — have to be subtracted out to keep them from artificially inflating domestic production.

The first-quarter import influx likely won’t be repeated in the April-June quarter and therefore shouldn’t weigh on GDP. In fact, economists expect second-quarter growth to bounce back to 3%, according to a survey of forecasters by the data firm FactSet.

The first look at April-June GDP growth is due July 30.

Wiseman writes for the Associated Press.