US economy shrinks 0.3% in first quarter as Trump trade wars disrupt business

Paul Wiseman, Associated Press

The US economy shrank at a 0.3% annual pace from January through March, the first drop in three years, as President Donald Trump’s trade wars disrupted business.

First-quarter growth was slowed by a surge in imports as companies in the United States tried to bring in foreign goods before Mr Trump imposed massive tariffs.

The January-March drop in gross domestic product (GDP) – the nation’s output of goods and services – reversed a 2.4% gain in the last three months of 2024.

Imports grew at a 41% pace, the fastest since 2020, and shaved five percentage points off first-quarter growth.

Spending

Consumer spending also slowed sharply – 1.8% growth from 4% in October-December last year.

Federal government spending plunged 5.1% in the first quarter.

Forecasters surveyed by the data firm FactSet had, on average, expected the economy to eke out 0.8% growth in the first quarter, but many expected GDP to fall.

Financial markets sank on the report.

But business investment rose at a 21.9% clip as companies poured money into equipment.

And a category within the GDP data that measures the economy’s underlying strength rose at a healthy 3% annual rate from January through March, up from 2.9% in the fourth quarter of 2024.

This category includes consumer spending and private investment but excludes volatile items such as exports, inventories and government spending.

Imports

The surge in imports – the fastest since 1972 outside Covid-19 economic disruptions – is likely to reverse in the second quarter, removing a weight on GDP.

For that reason, Paul Ashworth of Capital Economics forecasts that April-June growth will rebound to a 2% gain.

But many economists say that Mr Trump’s massive import taxes – and the erratic way he has rolled them out – will hurt growth in the second half of the year and that recession risks are rising.

Mr Trump inherited a solid economy that had grown steadily despite high interest rates imposed by the Federal Reserve to fight inflation.

His erratic trade policies – including 145% tariffs on China – have paralysed businesses and threatened to raise prices and hurt consumers.

There is potential evidence emerging that the solid job market, a pillar of the US economy during the pandemic recession, may be weakening.

On Wednesday, payroll provider ADP showed that companies added just 62,000 jobs in April, about half of what was expected, and down from 147,000 in March.

That could be a signal that businesses may be taking a more cautious approach to hiring amid uncertainty over tariffs.

Still, the ADP figures often diverge from the government’s jobs reports.

Employers in the education and health, information technology, and business and professional services industries all cut jobs.

Business and professional services include sectors such as engineering, accounting and advertising.

“Unease is the word of the day,” said Nela Richardson, chief economist at ADP.

“It can be difficult to make hiring decisions in such an environment.”