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The US economy shrank by 0.3% in early 2025, ending nearly three years of growth.
The slowdown was driven by increased imports ahead of tariffs and reduced government spending.
Economists warn of a potential recession, citing decreased consumer spending and tariff-related uncertainty.
The United States economy shrank in the first three months of 2025, contracting by an annualised rate of 0.3% – a stark reversal after nearly three years of solid growth, as tariff-related uncertainty upended spending patterns and raised fears of an impending recession.
The new report on gross domestic product,released by the Bureau of Economic Analysis on Wednesday morning (local time), showed the first deceleration of the US economy since the pandemic-fueled supply chain woes of early 2022.
This economic slowdown came primarily from a dramatic increase in imports – which count against GDP – as businesses rushed to purchase foreign goods ahead of President Donald Trump’s promised tariffs.
A drop in government spending also weighed on growth, and separately, consumer spending slowed, especially compared with recent months, as Americans hit the brakes on large purchases.
Donald Trump dismissed the negative GDP reading, calling it an “overhang” from the previous administration. Photo / Getty Images
“Growth has simply vanished,” Chris Rupkey, chief economist at Fwdbonds, a financial research firm, wrote in a note to clients after the report’s release. “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 advisers to sugarcoat this.”
Financial markets initially recoiled at the news, with all three major indexes trading lower for much of Wednesday before paring back those losses later in the day. Still, it was a tough month for the stock market, with the Dow Jones Industrial Average losing more than 3% of its value and the S&P 500 down about 1%.
Trump dismissed the negative GDP reading, calling it an “overhang” from the previous administration.
“This is Biden’s Stock Market, not Trump’s,” he posted on his social media site, Truth Social. “Tariffs will soon start kicking in, and companies are starting to move into the USA in record numbers … 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.”
Still, economists attribute recent economic shifts to tariff-related anxiety. Earlier in the year, families and businesses ramped up purchases of foreign-made goods, including industrial equipment, cars, electronics, clothing and furniture, ahead of the Trump administration’s tariffs, which largely went into effect this month. As a result, the US imported nearly twice as many goods as it exported in March.
The trade deficit – the difference between incoming and outgoing goods – is the widest it has ever been, which is expected to be a significant drag on economic growth. Sales of American-made goods to other countries help bolster GDP, while purchases of foreign-made products count against it.
GDP, the sum of all goods and services produced in the country, is the broadest measure of the economy. In the latest quarter, a surge of imports subtracted a record five percentage points from the reading. That drop was largely offset by consumer spending and business investments, though economists warn that those gains were probably the result of tariff-related front-loading and likely to lead to less spending later in the year.
“What we see is a series of one-time factors propping up the economy, in the guise of a $140 billion inventory accumulation and a 22% increase in equipment spending,” said Joe Brusuelas, principal and chief economist for RSM US. “Those are going to completely reverse and then some, which tells me we’re ripe for the onset of a recession midyear.”
Democrats were quick to pounce on the President’s handling of the economy, with Senate Minority Leader Charles E. Schumer (D-New York) saying Trump must “admit his failure and reverse course, and immediately fire his economic team”.
Economists say emerging economic weakness is not just a sign of current trepidation but, more pointedly, a warning that the situation may continue to worsen as the full effect of tariffs comes into view.
The fact that many families and businesses have already stocked up on cars, appliances and other big-ticket items, for instance, means they won’t have to make those purchases again anytime soon, further denting consumer spending. And businesses, which have largely held off on investments and hiring, are unlikely to reverse course right away.
“The weakness this quarter is also a preview of weakness in future quarters,” said Tara Sinclair, director of the Centre for Economic Research at George Washington University. “We are seeing a dramatic change in people’s behaviour, similar to what we saw during the shock of the pandemic. They’re front-loading purchases they might’ve made later in the year, and that’s very concerning for future quarters.”
Although economists generally agreed that growth has petered out this year, their predictions ahead of the GDP report varied wildly: The Federal Reserve Bank of Atlanta’s economic growth model was forecasting a 1.5% contraction in the first quarter, while the New York Fed’s version was predicting 2.6% growth. Most economists’ forecasts fell somewhere in between, though large swings in trade, business inventories and consumer spending have made it particularly tough to gauge the state of the economy.
Some economists said the GDP report is likely to have overstated weakness in the economy. They pointed to a 3% increase in final sales to private domestic purchasers – a measure of the economy that excludes trade and inventories – as a sign that consumers and businesses are still on solid footing.
Peter Navarro, Trump’s senior trade adviser, doubled down on that argument, saying GDP had been skewed by tariff-related stockpiling.
“When you strip all of that out, and you strip out the volatility of inventories in the equation, we actually had about 3% GDP growth, which is very, very good and quite encouraging for employment,” Navarro said, speaking with reporters at the White House.
A separate government report on Wednesday showed some progress on the Federal Reserve’s fight against inflation. But lingering uncertainty over Trump’s trade policies – which could drive prices higher in the months ahead – are likely to keep the Fed in a holding pattern for now. Although the central bank cut interest rates three times late last year as inflation started to ease, it has held off on further reduction despite pressure from the President as officials wait to see what trade wars do to the economy.
“The level of the tariff increases announced so far is significantly larger than anticipated,” Fed chair Jerome H. Powell said this month at the Economic Club of Chicago. “The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”
Still, the latest personal consumption expenditures report shows cooling inflation: The price index rose 2.3% in March from a year earlier, down from 2.5% the previous month. That metric, not the consumer price index, is the Fed’s preferred inflation gauge.
Notably, the report showed a sharp monthly increase in consumer spending on motor vehicles and parts – another sign that buyers hurried to make purchases ahead of expected tariffs.
Those large spending shifts are further muddling the economic picture at a time when there’s already little clarity on what comes next. The Trump administration’s sweeping new tariffs – which include a 10% tax on all imports and up to 145% on Chinese goods – have raised concerns that inflation may worsen.
Perhaps the most significant wild card, economists say, is how Americans will respond in the months to come. Consumer spending, which makes up nearly 70% of GDP, has been driving much of the economy’s recent growth. But surveys show many are worried about worsening inflation and unemployment, and consumer confidence has dropped to its lowest level since May 2020, according to data released by the Conference Board this week.
There are also signs that Americans are starting to pull back on nonessentials. Consumer spending growth slowed to 1.8% in the first quarter, from a 4% pace at the end of last year, the GDP report shows.
“Everything is lining up for a much weaker, perhaps recessionary, economy dead ahead,” said Mark Zandi, chief economist at Moody’s Analytics. “Perhaps the most worrisome aspect of the report is the downshift in consumer spending growth – and that’s despite the forward-buying because of tariffs. The consumer is the key to the outlook, and if the consumer starts to pack it in, we’re going into recession.”
Carmine’s, a chain of family-style Italian restaurants with locations in New York, Washington DC and Las Vegas, is seeing an increase in customers, as cash-strapped families and businesses eschew pricier options, said Jeffrey Bank, chief executive of parent company Alicart Restaurant Group. Even though they are booking parties, it’s clear they are feeling jittery, he said: For the first time, many are asking about the company’s cancellation policies before signing contracts.
“People are nervous: Will there be a recession? Will I lose my job? Is my 401(k) up, down or sideways? They’re trading down from their expensive steakhouse and coming to us,” he said. “We saw it during the financial crisis, and we’re seeing it now.”
