US Economy Shrinks: Understanding the Impact

First Quarterly Decline in Three Years

The US economy shrank by 0.5% in the first quarter of 2025. This is the first decline in three years. The main cause? Trade policies that led to a surge in imports and disrupted businesses.

Unexpected Downgrade

Experts predicted a smaller decline of 0.2%. However, the actual drop was much larger. American companies rushed to import goods before new tariffs started. This rush hurt the economy more than expected.

Surge in Imports

Imports jumped by 37.9%. This is the fastest increase since 2020. The surge in imports reduced GDP growth by nearly 4.7%. This change marks the first quarterly decline since 2022. It reverses the 2.4% growth seen at the end of 2024.

Consumer Spending Slows

Consumer spending grew by only 0.5%. This is much slower than the 4% growth in the previous quarter. It is also lower than earlier government estimates.

Economic Strength Weakens

A key measure of economic strength grew at 1.9% between January and March. This is slower than the 2.9% growth in the last quarter of 2024. This measure includes consumer spending and private investment. It excludes more volatile factors like exports and government spending.

Government Spending Falls

Federal government spending fell by 4.6%. This is the steepest decline since 2022.

How Did Imports Affect US GDP?

GDP measures what is produced domestically. It does not include imports. So, imports are subtracted from GDP to avoid inflating the numbers. This is why the surge in imports hurt GDP growth.

What Do Economists Say?

Economists think this slump may be temporary. They do not expect the same issues to repeat in the next quarter. Many forecasters predict a rebound. They expect GDP growth to reach 3% in the second quarter, according to a FactSet survey.

The first official estimate of second-quarter GDP will be released on July 30.