The US economy stumbled into reverse in the first quarter of the year, posting a us gdp contraction of 0.3%—its worst quarterly performance since 2022. The Commerce Department’s gdp report today revealed a sharp downturn from the 2.4% growth of Q4 and fell well below economists’ forecasts of +0.8%.
Trade Deficit and Government Cuts Drive US GDP Decline
Analysts point to President Donald Trump’s aggressive tariff campaign as a key destabilizing factor. Imports surged by 41.3%—a record swing from -1.9% in the previous quarter—as consumers rushed to front-load purchases before new duties took effect. Exports rose just 1.8%. Since GDP subtracts imports, the swollen trade deficit became the largest drag on growth since records began in 1947.
Meanwhile, federal government spending plunged to -5.1%, down from +4% in Q4. As a result, the combined effect of wider trade deficits and government cutbacks overshadowed other economic sectors, pushing overall output into negative territory.
Mixed Signals: Consumers Cautious, Businesses Gear Up
Consumer spending—responsible for roughly 70% of us economy output—slowed sharply to a 1.8% annualized rate, down from 4% in the prior quarter. This was the slowest consumer growth since mid-2023 and reflected Americans pulling back on goods purchases amid rising prices and uncertainty.
Yet businesses ramped up investment, boosting gross private domestic investment by 21.9%, the strongest pace since late 2021. Non-residential fixed investment jumped 9.8% after a 3% decline in Q4, driven largely by firms stockpiling inventories ahead of further tariff price hikes.
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“That uptick in business investment is not what firms do when they’re concerned about the economic outlook,” said Stephen Miran, chair of the White House Council of Economic Advisers.
Final sales to private domestic purchasers—a key measure of underlying demand—accelerated to 3%, up from 2.9%, suggesting continued resilience in core consumer and business demand.
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Inflation Accelerates, Stocks Tumble
Amid the contraction, inflation edged higher. The Personal Consumption Expenditures (PCE) price index—a favorite Fed gauge—rose 3.6% in Q1, up from 2.4% in Q4. Core PCE (excluding food and energy) climbed 3.5%, versus 2.6% previously.
Markets reacted swiftly: stock market news outlets reported a broad sell-off following the report, as investors weighed the twin risks of slowing growth and rising prices.
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Trump, Navarro, and the Political Backlash
President Trump, facing criticism over his tariff regime, pinned the weak q1 gdp on lingering “Biden Overhang” rather than his own policies. “When the boom begins, it will be like no other. BE PATIENT!!!” he wrote on social media. In a Cabinet meeting, he reiterated, “That’s Biden, that’s not Trump.”
Yet his top trade adviser, Peter Navarro, hailed the print as “the best negative print I have ever seen.” Navarro urged markets to look “beneath the surface” at strong business investment, despite most of that build-up stemming from companies hedging against future tariff cost reports.
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Labor Market Holds, Recession Risk Looms
Despite the dip in GDP, unemployment remains relatively low at 4.2% (March). But private-sector hiring is cooling: ADP’s April report showed just 62,000 jobs added, down from 147,000 in March.
Economist Gregory Daco of Ernst & Young warned, “We’re on this razor-thin edge where the longer the tariffs remain in place the more likely we are headed for an economic downturn.” While two consecutive negative quarters define a technical recession—and the US isn’t there yet—the data underscore the fragility of current growth.
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