The U.S. economy shrank during the first three months of 2025, marking the first contraction in three years as businesses scrambled to front-load imports ahead of new tariffs announced by President Donald Trump.
The unexpected drop in gross domestic product (GDP), down 0.3% on an annualized basis, comes just months into Trump’s second term, deepening anxiety over his trade policies and triggering fresh market jitters.
On Wednesday, the Commerce Department reported that GDP, the broadest measure of economic activity, declined for the first time since the first quarter of 2022. Analysts had expected growth of 0.4%, especially after a stronger-than-anticipated 2.4% expansion in Q4 of 2024. But an unforeseen 41.3% surge in imports, the biggest quarterly increase outside the COVID-19 era since 1974, dragged GDP sharply into negative territory, subtracting over five percentage points from the headline number.
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While trade swings are notoriously volatile and often reversed in subsequent quarters, the data sent alarm bells ringing across Wall Street. Stock futures dipped, and Treasury yields climbed following the release. The surprise contraction also landed a blow politically, just as Trump prepares for further trade battles.
Trump Blames Biden for Contraction — and Signals More to Come
During a Cabinet meeting hours after the report was released, Trump quickly distanced himself from the economic setback, pinning the blame on his predecessor, Joe Biden.
“This is Biden,” Trump declared. “And you could even say the next quarter is sort of Biden because it doesn’t just happen on a daily or an hourly basis.”
Trump pointed to the timing of his inauguration, insisting that the economy was still running on Biden-era momentum when the negative numbers were being generated.
“We took, all of us, together, we came in on January 20th,” he said. “The stock market in this case says how bad the situation we inherited.”
The remarks followed a post on Truth Social in which Trump tried to reframe the downturn as a symptom of Democratic mismanagement.
“This is Biden’s Stock Market, not Trump’s. I didn’t take over until January 20th,” he wrote. “Tariffs will soon start kicking in, and companies are starting to move into the USA in record numbers. Our Country will boom, but we have to get rid of the Biden ‘Overhang.’”
Trump added: “This will take a while, has NOTHING TO DO WITH TARIFFS, only that he left us with bad numbers, but when the boom begins, it will be like no other. BE PATIENT!!!”
However, the Commerce Department’s own breakdown contradicts Trump’s claims. The data point directly to the economic impact of his own policy — specifically, a tariff plan unveiled early in April. The announcement led importers to rush in foreign goods to avoid higher duties, bloating the trade deficit and dragging GDP down.
Tariffs and Trade Shock Shape the Quarter
Imports of goods surged nearly 51%, as businesses rushed to beat the start of 10% across-the-board tariffs Trump introduced on U.S. trade partners. Though those tariffs were later paused for a 90-day negotiation window, a move yet to yield deals, the early announcement still triggered a scramble in global supply chains. Exports, by comparison, rose only 1.8%.
Consumer spending, which typically powers the U.S. economy, also slowed sharply. Personal consumption expenditures rose 1.8%, down from a 4% increase in the previous quarter. This was the slowest pace of consumer growth since mid-2023, though monthly data from March showed a modest rebound with spending up 0.7%, ahead of expectations.
Private domestic investment, however, offered a rare bright spot. Investment rose 21.9%, largely driven by a 22.5% jump in equipment purchases — likely another front-running response to the anticipated tariffs.
Federal government spending contracted as well, falling 5.1% amid President Trump’s early push for budget tightening through the Department of Government Efficiency led by Elon Musk. The decline shaved about one-third of a percentage point off GDP.
Economists Warn of Deeper Risks
“Maybe some of this negativity is due to a rush to bring in imports before the tariffs go up, but there is simply no way for policy advisors to sugar-coat this. Growth has simply vanished,” said Chris Rupkey, chief economist at Fwdbonds.
Robert Frick, a corporate economist with Navy Federal Credit Union, said the data is concerning, particularly the sluggish consumer spending, but not yet catastrophic.
“The more telling number for the future of the expansion was consumer spending, and it grew, but at a relatively weak pace,” he said. “That’s concerning, but not alarming as it could have been due to bad weather and a spending surge at the end of last year.”
Still, Frick noted, the headline contraction sets a troubling tone for the second quarter, especially if Trump’s tariffs stay in place beyond the 90-day suspension.
Inflation Complicates Fed Outlook
The economic report also poses a dilemma for the Federal Reserve ahead of next week’s policy meeting. The GDP data would typically bolster arguments for cutting interest rates to stimulate growth, but inflation measures surged in Q1, casting doubt on how quickly the Fed can pivot.
The personal consumption expenditures (PCE) price index, the Fed’s preferred gauge, climbed 3.6%, up from 2.4% in the prior quarter. Core PCE, which strips out food and energy, rose 3.5%, suggesting persistent underlying price pressure. A broader inflation measure, the chain-weighted price index, rose 3.7%, far above the 3% forecast.
Later in the day, the Commerce Department noted that March’s PCE price index rose 2.3% annually, while core PCE was in line at 2.6%.
Despite those figures, markets are still betting that the Fed will prioritize growth, pricing in a rate cut at the June meeting and anticipating as many as four cuts by year’s end.
Jobs Report Next Critical Test
While the economy is still adding jobs, with employment costs rising 0.9% last quarter, the slowdown in GDP raises concerns about whether the labor market can continue to defy the broader trend. On Wednesday, payroll processor ADP reported just 62,000 private-sector hires in April, far below the previous months.
The more closely watched nonfarm payrolls report is due Friday and could play a major role in shaping market sentiment and White House messaging.
The contraction puts Trump in a precarious spot: launching aggressive trade measures intended to boost American industry while presiding over a shrinking economy. And while the president is quick to point the finger at Biden, economists are pointing squarely at Trump’s own policies as the immediate cause of the pullback.