U.S. economy shrank in 1st quarter, falling short of expectations

The U.S. economy shrank at a 0.5 per cent annual pace from January through March as President Donald Trump's trade wars disrupted business, the Commerce Department reported Thursday in an unexpected deterioration of earlier estimates.

First-quarter growth was weighed down by a surge of imports as U.S. companies, and households, rushed to buy foreign goods before Trump could impose tariffs on them. The Commerce Department previously estimated that the economy fell 0.2 per cent in the first quarter. Economists had forecast no change in the department's third and final estimate.

The January-March drop in gross domestic product — the nation's output of goods and services — reversed a 2.4 per cent increase in the last three months of 2024 and marked the first time in three years that the economy contracted. Imports expanded 37.9 per cent, the fastest since 2020, and pushed GDP down by nearly 4.7 percentage points.

Consumer spending also slowed sharply, expanding just 0.5 per cent, down from a robust four per cent in the final quarter of 2024, and a sharp downgrade from the Commerce Department's previous estimate.

"Consumers tightened their wallets a lot more than initially anticipated in the first three months of the year as tariff uncertainty weighed," wrote Priscilla Thiagamoorthy, a senior economist at Bank of Montreal.

A category within the GDP data that measures the economy's underlying strength rose at a 1.9 per cent annual rate from January through March. It's a decent number, but down from 2.9 per cent in the fourth quarter of 2024 and from the Commerce Department's previous estimate of 2.5 per cent January-March growth.

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This category includes consumer spending and private investment but excludes volatile items like exports, inventories and government spending. Ryan Sweet of Oxford Economics called the downgrade in that figure "troubling," though he doesn't expect to make a significant change to his near-term economic forecast.

And federal government spending fell at a 4.6 per cent annual pace, the biggest drop since 2022.

Trade deficits reduce GDP. But that's just a matter of mathematics. GDP is supposed to count only what's produced domestically, not stuff that comes in from abroad. So imports — which show up in the GDP report as consumer spending or business investment — have to be subtracted to keep them from artificially inflating domestic production.

The first-quarter import influx likely won't be repeated in the April-June quarter and therefore shouldn't weigh on GDP. In fact, economists expect second-quarter growth to bounce back to three per cent, according to a survey of forecasters by the data firm FactSet.

The first look at April-June GDP growth is due July 30.