The U.S. economy contracted at an annual rate of 0.2% in the first quarter of 2025, marking its first decline in three years. According to a revised estimate released by the Commerce Department on Thursday, the economic downturn was largely driven by President Donald Trump’s trade policies, particularly the imposition of tariffs, which disrupted normal business activity. The updated figure was a slight improvement from the government’s original estimate, though it still reflects an overall slowdown in economic momentum.
A key factor behind the drop was a significant increase in imports during the first three months of the year. Companies rushed to bring in foreign goods ahead of the president’s widely publicized tariff hikes. This surge in imports, while representing increased spending on foreign products, had a negative effect on GDP calculations because imported goods are not counted as part of domestic production.
Gross domestic product (GDP), the broadest measure of the nation’s economic activity, had expanded by 2.4% in the final quarter of 2024. However, the sudden spike in imports in early 2025 reversed that growth. Imports jumped at a remarkable annual rate of 42.6%, the fastest pace since the third quarter of 2020, and this alone subtracted more than five percentage points from GDP. In addition to the impact of trade, consumer spending also experienced a marked slowdown.
Federal government expenditures contributed further to the decline. Spending fell at an annual rate of 4.6% from January through March, representing the largest contraction in federal outlays in three years.
The way imports affect GDP is primarily a technical matter. Imports are subtracted from the GDP calculation to ensure that only domestically produced goods and services are counted. As an example, when an American consumer buys Costa Rican coffee, it shows up as consumer spending. But because the product was not made in the United States, it is later subtracted to avoid distorting the true level of domestic production.
Economists believe the unusual import surge observed in the first quarter is unlikely to recur in the second quarter, which spans April through June. As a result, imports are not expected to exert the same downward pressure on GDP in the next government report.
Despite the overall contraction, there were some areas of strength within the economy. Business investment grew at a robust annual rate of 24.4% in the first quarter. One reason for this was that companies increased their inventories in anticipation of the tariffs, boosting overall economic activity. This buildup of inventories added more than 2.6 percentage points to GDP growth during the quarter.
A specific measure within the GDP data that reflects the core strength of the economy rose by 2.5% annually in the first quarter. This figure, while lower than the 2.9% rate recorded in the previous quarter, still suggests the economy maintains a solid foundation. This core measurement includes consumer spending and private investment but excludes more volatile components like exports, government spending, and changes in inventories.
Still, the outlook for the economy remains clouded by policy uncertainty stemming from President Trump’s aggressive trade stance. His administration has implemented 10% tariffs on nearly every trading partner worldwide, in addition to targeted levies on steel, aluminum, and automobiles. These actions have led to significant unease among businesses and consumers, and their long-term effects remain uncertain.
This week, a federal court added to the uncertainty by blocking some of the tariffs introduced by the Trump administration. The court ruled that the president had exceeded his legal authority by imposing 10% tariffs and other specific duties on goods from Canada, Mexico, and China. The ruling could lead to further legal and political challenges to the administration’s trade policy and may complicate efforts to renegotiate trade agreements.
The Commerce Department’s report issued Thursday is the second in a series of three estimates for the first quarter’s GDP. A final, more comprehensive revision is scheduled to be released on June 26. This upcoming report will incorporate additional economic data and provide a more complete picture of the country’s economic performance during the early months of 2025.
Overall, while the first quarter’s economic decline reflects real challenges tied to trade policy and consumer caution, some underlying metrics continue to show resilience. But as the legal and economic implications of the president’s tariffs play out, businesses and policymakers alike will be watching closely for signs of either recovery or further disruption.
The report paints a complex picture: on one hand, it reflects the drag caused by an extraordinary surge in imports and reduced government spending, and on the other, it reveals solid business investment and a still-growing core economy. Whether those strengths will be enough to offset continued trade tensions in future quarters remains to be seen.
Economists and analysts have emphasized that while GDP is a critical gauge of economic health, short-term changes can be volatile, especially when influenced by policy-driven shifts such as tariffs. Still, the drop in GDP, even if slight, has raised concerns.
President Trump has framed his tariff strategy as a means to bolster American industry and reduce the country’s trade deficit. However, the short-term outcome, at least as captured in this latest GDP report, has been mixed. The administration’s efforts have triggered import spikes, supply chain disruptions, and a response from trading partners, all of which have fed into the current economic narrative.
What happens next will depend in part on how businesses adapt to the new trade environment and whether consumer spending rebounds in the coming months. The final GDP report in June will be a critical indicator, not just for economists but for the broader public and political leadership heading into the second half of the year.
As the nation waits for further economic updates, the first quarter’s data is a reminder of how interconnected global trade, domestic policy, and consumer behavior truly are—and how quickly shifts in one area can ripple across the entire economy.