Wednesday morning, we learned that the U.S. economy contracted slightly in the first quarter of 2025. Real gross domestic product was down 0.3%, a minor contraction but a large step down from the prior quarter’s GDP growth rate of 2.4%.
The negative impact of the tariffs, in particular, comes through clearly in the report.
Ever since President Donald Trump launched his trade war and his attacks on Federal Reserve independence, all accompanied by chaotic policy lurching, surveys of consumers and businesses have shown sharp drop-offs in confidence and sharp increases in expectations of higher inflation. Financial markets, of course, have been battered about, rising when the administration dials back the tariffs and vice versa. We’ve all been on some degree of pins and needles, waiting to see whether another self-inflicted wound is incoming.
But for all that angst, until today, we didn’t see much impact of the president’s actions in the so-called hard data, meaning the numbers we get about the economy’s performance from the statistical agencies.
That’s why this GDP report is so important. The negative impact of the tariffs, in particular, comes through clearly in the report, which shows data only from January to March. So the report isn’t even reflecting the long list of “reciprocal tariffs,” currently on pause, that were announced on April 2.
One number from the GDP report embodies this impact: The trade balance took a huge dive in Q1, subtracting 4.8 percentage points from the growth rate. In a data series that goes all the way back to 1947, we’ve never seen a larger negative impact from trade in one quarter.
OK, that’s dramatic. But what does it mean?
There’s no mystery here. It means that consumers and businesses got very busy in January through March trying to front-run the tariffs, pulling forward spending that they normally would have spread across the year. In fact, we saw this coming. An earlier release of retail sales for March showed car and truck purchases getting a big bounce.
And it’s not just imports. People and businesses are reasonably worried that tariffs will boost prices of domestic goods, which, as I’ve stressed on this page, often include imported parts. Business equipment investment, including computers and software, was a bright spot in the report, up over 22%. But if those purchases were also pulled forward — and given the large spike in inventories, this appears to be the case — it implies that future quarters could come in even weaker. More spending now, less spending later.
Does this mean we’re in a recession? Definitely not. One bad quarter doesn’t make a new trend. The import spike (a historically large negative) and the inventory spike (a large positive) are based on incomplete data that will be fleshed out more in coming months. And while consumer spending slowed to 1.8% in Q1 of 2025 from a much stronger 4% in Q4 of 2024, that’s still a decent growth rate for this key GDP component, enough to keep the economy above stall speed.
We’ve all been on some degree of pins and needles, waiting to see whether another self-inflicted wound is incoming.
But this is a worrisome report. It syncs up all too well with what we’ve been hearing about how folks are feeling about the Trump economy, which is now polling underwater. It shows that Americans are highly attuned to, and quite well-informed about, the impact of the trade war on their living standards and are trying to get ahead of it.
It also shows something else. I’ve been tracking these reports for decades now, and I’ve gotten pretty good at sniffing out what’s signal and what’s noise. And I can still feel a pulse, a pretty strong one, in the U.S. macroeconomy. The Trumpian chaos has clearly taken a toll on growth, as that topline minus-0.3% shows. But the chaos hasn’t yet broken the fundamentals. The job market’s still pretty robust; even with new inflationary pressures, real wage growth is still up.
If the administration were to stop now, to declare victory in the trade war (there’d be no actual victory, but when has that mattered to Trump?) and to send a clear message, one that they actually stick to, that they’re not going to reverse course tomorrow, there’s still time to dig out of the mess it has put us in. The hole isn’t yet too deep.
But I fear it won’t do so, and if I’m right, then we will likely remember this report as one of the first examples of the hard data starting to look just as bad as the soft data.