U.S. Economy Contracts Amid Tariff Surge and Import Spike

The U.S. economy shrank in the first quarter for the first time since 2022, as a surge in imports—driven by businesses trying to get ahead of tariff hikes—dragged down growth. The Commerce Department reported a 0.3% annualized drop in gross domestic product (GDP), highlighting the disruptive effects of former President Donald Trump’s unpredictable trade policies.

While the headline figure suggests a slowdown, the underlying data was more mixed. Consumer spending grew at a slower 1.8% pace, down from 4.0% in the previous quarter, and businesses ramped up investment in equipment, likely anticipating cost increases from upcoming tariffs. Much of the spending, both by consumers and businesses, appears to have been front-loaded before the new import duties took effect.

The report comes as public dissatisfaction with Trump’s economic management grows, especially as he marks his first 100 days back in office. Confidence among consumers and businesses has dropped, with major airlines pulling back financial forecasts due to uncertainty over non-essential spending caused by higher tariffs.

Economists say the trade imbalance will likely correct itself in the next quarter, but the long-term impact of rising tariffs and uncertainty could weigh on future growth. “Tariffs are essentially taxes on imports,” said Carl Weinberg, chief economist at High Frequency Economics. “Even if growth returns next quarter, the broader damage may resurface by year-end.”

The GDP was also hit by a reduction in federal government spending, likely a result of deep cuts and program shutdowns under Trump’s administration. The 0.3% contraction was worse than economists’ expectations, which had predicted modest 0.3% growth before a record goods trade deficit in March forced sharp revisions.

Imports soared at a 41.3% rate—the biggest jump since late 2020—while export growth was modest. The resulting trade gap slashed a record 4.83 percentage points from GDP. Imports were fueled by strong demand for both consumer and capital goods, including silver bars treated as non-investment valuables, which were excluded from official GDP metrics.

Meanwhile, inventories rebounded after two quarters of decline, slightly cushioning the blow from trade. Business investment in equipment jumped 22.5%, while core domestic demand (final sales to private domestic purchasers) rose by a strong 3.0%, though this was also likely affected by tariff-related distortions.

Inflation pressures grew last quarter. The core Personal Consumption Expenditures (PCE) price index—which excludes food and energy—rose at a 3.5% pace, up from 2.6% in the fourth quarter. This is well above the Federal Reserve’s 2% inflation target.

Despite this, many economists expect the Fed to resume interest rate cuts later this year in response to slower growth and rising uncertainty.

In an effort to ease pressure on automakers, Trump signed an executive order softening some auto tariffs by offering tax credits and waivers on imported parts. However, a steep 145% tariff on Chinese goods remains in place, along with other duties. Trump continues to use tariffs as a means of raising revenue and reviving U.S. manufacturing.