The United States economy contracted at a 0.2 percent annual pace in the first quarter of 2025, marking the first drop in three years, as President Donald Trump’s aggressive trade policy — including sweeping tariffs — disrupted domestic demand, stoked business uncertainty, and widened the trade deficit.
The Commerce Department revised its initial estimate of a 0.3 percent decline to 0.2 percent, but the downgrade still captures the brunt of the tariff shock that rattled markets and pushed businesses into panic buying. A surge in imports, as U.S. companies raced to bring in foreign goods before the full weight of Trump’s duties took effect, slashed over five percentage points off gross domestic product (GDP) growth.
Imports jumped at a 42.6 percent annual rate, the fastest since the third quarter of 2020, outpacing domestic production and inflating the trade deficit, which by GDP calculation standards is subtracted from economic output. Economists say this spike was a direct response to the administration’s escalating tariffs on a wide range of goods including steel, aluminum, autos, and consumer products from China, Canada, Mexico, and the European Union.
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“Businesses front-loaded imports ahead of the tariff deadlines, and that distorted the GDP reading,” said Scott Wendell, a senior economist with Atlanta Capital Economics. “This isn’t sustainable. You’re unlikely to see a repeat in Q2, but the damage has already been done.”
Consumer Spending, Government Outlays Also Slowed
The report also showed a marked slowdown in consumer spending, which grew at just 1.2 percent — a sharp drop from 4 percent in the previous quarter. Household sentiment has weakened amid price hikes linked to the tariffs, which increased costs of everyday goods ranging from cars to appliances and groceries.
Federal government spending also declined by 4.6 percent, the steepest drop in three years, as agencies tightened budgets in response to fiscal pressures and political gridlock in Washington.
However, there were pockets of strength. Business investment surged 24.4 percent, with companies ramping up spending on equipment and construction. A buildup in inventories, as firms stockpiled supplies ahead of tariffs — added 2.6 percentage points to GDP, partially cushioning the overall decline.
Another measure used to gauge the economy’s underlying health, which strips out volatile components like inventories, government spending, and trade, rose at a solid 2.5 percent annual rate, though it was still down from 2.9 percent in the previous quarter.
Court Blocks Key Tariffs, Offering Hope for Recovery
In a major twist, a federal court on Wednesday blocked Trump’s sweeping 10 percent tariffs, including targeted levies on imports from Canada, Mexico, and China, ruling that the president had exceeded his legal authority.
“Today a court ruled exactly what I said from the beginning: the power to tax lies with Congress, not one man, and tariffs must originate in the House. So if House Republicans want to impose tariffs, let them vote to enact them,” Peter Schiff, Chief Economist & Global Strategist at Europe Pacific, said.
The decision immediately halted further implementation of the contested duties and is expected to ease some pressure on both consumers and businesses going into the second quarter.
The ruling comes on the heels of mounting criticism from industry leaders and economists who described the tariffs as illegal and warned that although Trump intended to use them as a measure to protect American manufacturing, they would backfire.
Outlook for Q2 and Beyond
Economists now expect some reprieve in the second quarter. With the panic-induced import surge unlikely to repeat, and with tariffs on pause, growth could rebound modestly. Forecasts for Q2 range between 1.5 to 2 percent annual growth, although risks remain.
President Trump has insisted that the trade policies are part of a long-term strategy to rebuild domestic industry and reduce dependence on foreign supply chains. But analysts note that the near-term cost to the broader economy — particularly consumers and small businesses — is too high.
Thursday’s data was the second of three GDP estimates for the first quarter. The final number will be released on June 26. Until then, markets and policymakers will be watching for signs of stabilization or further fallout from one of the most turbulent trade experiments in recent U.S. history.