Consumer spending slowed more than expected, imports surged
The U.S. economy contracted more sharply than previously estimated in the first quarter of 2025, as aggressive tariff policies and weak consumer spending weighed heavily on growth. According to the Commerce Department’s Bureau of Economic Analysis, gross domestic product (GDP) declined at a 0.5% annualized rate, revised from an earlier 0.2% drop.
The downward revision was primarily due to a significant reduction in consumer spending estimates, now seen rising at just 0.5% instead of 1.2%. The decline marks the first contraction since early 2022 and follows 2.4% growth in the fourth quarter of 2024.
Imports and tariffs skewed data
The steeper contraction was largely driven by a flood of imports as U.S. businesses rushed to stock up on goods before the implementation of sweeping tariffs introduced by President Donald Trump. This pre-emptive buying created distortions in the trade balance, inflating imports and temporarily boosting inventories—both of which weighed on headline GDP figures.
Domestic demand growth was revised down to 1.9% from 2.5%, highlighting broader weakness beyond just trade-related swings. As the flow of imports normalizes, the economy is expected to rebound in the second quarter, with the Atlanta Fed forecasting a 3.4% annualized growth rate. However, economists warn this may not indicate a sustained recovery.
“The extraordinary foreign-trade and inventory gymnastics that companies undertook to avoid U.S. tariffs created serious measurement challenges that will linger for some time,” said Lou Crandall, chief economist at Wrightson ICAP.
Income data paints a slightly better picture
When measured from the income side, gross domestic income (GDI) rose at a 0.2% rate, an upward revision from the initial estimate of a 0.2% decline. This improvement reflects a stronger reading on corporate profits, which fell by $90.6 billion but were revised up by $27.5 billion from earlier estimates.
The average of GDP and GDI, known as gross domestic output and considered a more balanced view of economic activity, was revised to a 0.1% decline from the initial 0.2% drop.
Outlook remains uncertain despite Q2 rebound
While headline GDP may rebound in the second quarter, key data on retail sales, housing, and labor markets point to underlying softness. Analysts caution that the headline numbers may overstate actual economic strength due to lingering distortions from trade activity and tariff-related stockpiling.