US economy contracts at 0.3pc rate in first quarter

The Australian

01-05-2025

The US economy contracted in the first three months of 2025, as businesses rushed to stock up on imports ahead of the Trump administration's tariffs and consumer spending slowed.
The Commerce Department said US gross domestic product — the value of all goods and services produced across the economy — fell at a seasonally and inflation adjusted 0.3 per cent annual rate in the first quarter. That was the steepest decline since the first quarter of 2022.
Consumer spending, the economy's main engine, rose at a 1.8 per cent pace in the first quarter, the smallest increase since mid-2023. Spending by the federal government fell as the Department of Government Efficiency cut jobs and contracts.
But the main driver of the first-quarter contraction was Trump's trade war. Net exports, the difference between what the US imports and exports, subtracted nearly 5 percentage points from headline GDP. That was the biggest quarterly drag from net exports on record dating back to 1947.
Businesses rushed to get ahead of tariffs that began to come into effect during the first three months of the year and were dramatically increased in the current, second quarter. Imports rose at the fastest pace since the third quarter of 2020, when the economy was reopening from pandemic lockdowns.
Imports subtract from the Commerce Department's calculation of GDP, since they represent spending on foreign-made goods and services.
'The headline decline overstates weakness because a lot of that was tariff-induced pull-forward,' said Shannon Grein, an economist at Wells Fargo. 'Overall, I think that it was a relatively solid underlying report when it comes to demand.'
Final sales to private domestic purchases, which tracks demand from businesses and consumers but not the more volatile government, inventory and international trade data, rose at a 3 per cent rate in the first quarter, up from 2.9 per cent the prior quarter. In another plus, businesses invested more in equipment and stocked inventories.
Still, the report is backward-looking, and turmoil from on-off tariff announcements and financial-market volatility has continued in the current quarter. Stocks fell sharply Wednesday morning. The GDP reading fell short of the 0.4 per cent growth that economists surveyed by The Wall Street Journal expected.
President Trump blamed former President Joe Biden for the state of the stock market, and urged patience until his tariffs kick in.
'This is Biden's Stock Market, not Trump's,' Trump wrote on Truth Social. 'I didn't take over until January 20th.'
Trump has made tariffs a cornerstone of his economic agenda, saying that they will in the long term make America richer and bring back manufacturing jobs. In March, the trade deficit in goods hit a record as businesses stocked up to get ahead of tariffs.
A separate report from the Commerce Department on Wednesday, just for the month of March, showed consumer spending rose at the strongest pace this year, with a big jump in vehicle sales as households sought to get ahead of tariffs.
Wednesday's GDP report 'probably overstates the economy's weakness, but the economy's weak,' said Mark Zandi, chief economist at Moody's, pointing to the slower consumer spending and the decline in federal government spending in the first quarter. A fall in consumer sentiment in April 'doesn't lend confidence that they're going to hang tough here,' he said.
'If the administration can't find an off-ramp on the tariffs soon … then I think we're going to see a lot more negative GDP numbers dead ahead, and ultimately job losses,' said Zandi.
The GDP report is the first major economic scorecard for the January-to-March quarter, a period in which the White House changed hands from Biden to Trump. January — most of which was before Trump took office — was hit by wildfires in Los Angeles and disruptive winter storms in many parts of the country.
Concerns about tariffs and the economy sent the S & P 500 and Nasdaq Composite to their worst quarters since 2022. Picture: Michael M. Santiago/Getty Images/AFP
The US economy entered the year on a strong footing: It grew at a steady pace in 2024 and inflation continued to ease. The labour market has continued to hold up in 2025, so far.
Still, businesses and individuals are saying they're worried about the economy, due to uncertainty around tariffs and worries they will bring higher prices. Investors also took fright. Concerns about tariffs and the economy sent the S & P 500 and Nasdaq Composite to their worst quarters since 2022.
After Trump took office in January, the new administration quickly announced levies on Mexico and Canada, which it later paused, as well as tariffs on Chinese imports. The 'Liberation Day' announcement of far broader tariffs came on April 2, at the beginning of the second quarter.
The CEOs of major companies including American Airlines, PepsiCo and Procter & Gamble have warned that stop-start tariff announcements are complicating their planning efforts and spooking consumers. Others are slashing costs. General Motors pulled its 2025 profit guidance Tuesday, citing auto tariffs.
'Uncertainty creates a pensive and anxious consumer,' Colgate-Palmolive Chief Executive Noel Wallace said last week, when the company lowered its full-year earnings estimate. 'You see consumers destock their pantries and not necessarily buy that extra toothpaste tube or that extra body wash.'
The CEOs of major companies including American Airlines, PepsiCo and Procter & Gamble have warned that stop-start tariff announcements are complicating their planning efforts and spooking consumers. AP /Ted Shaffrey
Annual inflation cooled in March, Commerce Department data showed. Still, economists expect that tariffs will eventually feed into higher prices.
The potential for a pick-up in inflation from tariffs combined with weaker economic momentum puts the Federal Reserve in a bind. The central bank seeks to balance dual goals of keeping inflation mild and the labour market strong.
Fed Chair Jerome Powell said in mid-April he saw a 'strong likelihood' that consumers would face higher prices and that the economy would see higher unemployment as a result of tariffs in the short run.
This would create a 'challenging scenario' for the central bank because anything it does with interest rates to address inflationary pressures could worsen unemployment, and vice versa, he said.
Wall Street Journal