US economy contracts 0.2% in Q1 on weak spending, record trade drag

By Agusta Saraiva 

The US economy shrank at the start of the year, restrained by weaker consumer spending and an even bigger impact from trade than initially reported. 

Gross domestic product decreased at a 0.2 per cent annualized pace in the first quarter, the second estimate from the Bureau of Economic Analysis showed Thursday. That compared with an initially reported 0.3 per cent decline. 

The economy’s primary growth engine — consumer spending — advanced 1.2 per cent, down from an initial estimate of 1.8 per cent and the weakest pace in almost two years. Meantime, net exports subtracted nearly 5 percentage points from the GDP calculation, slightly more than the first projection and the largest on record. 

The slight upward revision in GDP reflected stronger business investment and a greater accumulation of inventories. Federal government spending wasn’t as much of a drag as originally reported. 

GDP figures are revised multiple times as more data become available, enabling the government to fine-tune its estimate. The first projection, released in late April, showed the economy contracted for the first time since 2022. The final estimate is due next month. 

Economic growth was dragged down at the start of the year by a surge in imports as US businesses tried to get ahead of President Donald Trump’s tariffs. More moderate consumer spending, as well as a decline in federal government spending, also weighed on the figure. 

Since then, the White House has walked back or delayed some of the more punitive levies, and most of the tariffs have been blocked by a US trade court. While the pauses have helped calm Americans’ concerns about the economy and prompted many economists to scrap their recession calls, tariff rates are still substantially higher than before Trump took office.  

Forecasters largely expect GDP to rebound in the second quarter as higher duties discourage imports, and the goods already brought in will accumulate in larger inventories that add to growth. Beyond that, economists and policymakers will be paying close attention to how Trump’s policies — including trade, but also immigration and taxation — will impact consumer and business spending going forward. 

Thursday’s data showed underlying demand across the economy was weaker than initially thought in the first quarter. Final sales to private domestic purchasers — a measure favored by economists that combines consumer spending and business investment — rose at a 2.5 per cent rate, the slowest in nearly two years. 

Consumer spending was revised lower largely on weaker demand for cars. Outlays for services, including health care and insurance, were also lower.  

Trump contends his trade policies will stoke economic growth over the longer term through the revival of domestic manufacturing, which he says will boost employment and lower the prices of US-made goods. 

GDI Estimate 

The government’s other main gauge of economic activity — gross domestic income — fell 0.2 per cent, after a 5.2 per cent annualized advance in the fourth quarter. That was the first decline since the end of 2022. Whereas GDP measures spending on goods and services, GDI measures income generated and costs incurred from producing those same goods and services. 

The GDI data include figures on corporate profits. The 2.9 per cent decrease in profits — the most since 2020 — followed a 5.4 per cent advance in the fourth quarter. 

While recent data have suggested businesses are mostly taking the hit so far, many firms — including Walmart Inc., the world’s largest retailer — are warning that consumers will start seeing price hikes soon. 

Inflation Outlook 

The GDP report showed the Fed’s preferred inflation metric — the personal consumption expenditures price index index, excluding food and energy — rose 3.4 per cent at the start of the year, down slightly from the first projection. April PCE data are due Friday and will also offer insights into real consumer spending and wage growth at the start of the second quarter. 

While recent reports have pointed toward tamer inflation, Fed officials are still wary of price pressures rearing back up again, and, combined with heightened uncertainty, are keeping interest rates on hold for now. 

In separate data, continuing jobless claims, a proxy for the number of people receiving unemployment benefits, rose to the highest level since November 2021. Initial claims also increased, according to Labor Department figures released Thursday.