U.S. Economy Shrinks 0.5% in Q1, Revised Sharply Lower Than Estimated

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U.S. Economy Shrinks 0.5% in Q1, Revised Sharply Lower Than Estimated/ Newslooks/ WASHINGTON/ J. Mansour/ Morning Edition/ The Commerce Department updated its first-quarter GDP report, revealing a 0.5% annualized contraction from January to March—worse than the previous estimate of –0.2% and economists’ expectation of no growth. A flood of imports—up nearly 38%—as companies rushed to make purchases ahead of possible trade tariffs away hit GDP growth by approximately 4.7 percentage points. Consumer spending slowed dramatically with only 0.5% growth, sharply down from a 4% quarterly increase at the end of 2024.

FILE – The per-gallon price is illuminated on the pump at a Costco warehouse gasoline station Tuesday, April 1, 2025, in Thornton, Colo. (AP Photo/David Zalubowski, File)

Quick Snapshot

GDP change Q1 2025: –0.5% (revised from –0.2%)
Imports: +37.9% annual increase
Consumer Spending: +0.5% vs. +4.0% in Q4 2024
Core GDP indicator: +1.9% (down from +2.9%)
Federal spending: –4.6%, steepest drop since 2022
Q2 outlook (economists’ consensus): rebound to ~ +3.0%, first reading due July 30

U.S. Economy Shrinks 0.5% in Q1, Revised Sharply Lower Than Estimated

Deep Look

In-Depth Analysis

Unexpected Contraction in Q1
The U.S. economy shrank at a 0.5% annualized rate in early 2025, marking the first quarterly decline since 2022. This sharp downward revision—from a previous estimate of a 0.2% drop—caught economists off guard, reversing a solid 2.4% gain in Q4 2024. Forecasters had expected flat growth, reflecting a belief in economic resilience.

Trade Jolt from Tariff Anticipation
A surge in imports—rising 37.9%, the fastest pace since 2020—was the primary culprit. Companies rushed to import goods before anticipated tariff hikes, artificially inflating import volumes. Because GDP measures domestic production, higher imports subtract from the total, dragging down the headline figure by nearly 4.7 percentage points.

“A surge of imports … reversed a 2.4% increase in the last three months of 2024,” the Commerce Department reported.

Consumption and Domestic Demand Weaken
Consumer spending, which had powered much of the post-pandemic recovery, slowed dramatically to just 0.5%—down from a buoyant 4% in late 2024. This slump signals that American households are pulling back amid rising costs and economic uncertainty.

Meanwhile, a core measure of GDP—combining consumer spending and private investment while excluding volatile components like inventories and trade—grew at a modest 1.9%, decelerating from 2.9%.

Government Spending Also Takes a Hit
Federal outlays declined at a 4.6% annual rate, marking the steepest decrease since 2022. This pullback likely reflects budget tightening as the federal government navigates political and fiscal pressures.

Will Q2 Bring Rebound?
Economists anticipate that import-driven decline won’t repeat in Q2, projecting a snapback to around 3% growth. The next GDP release on July 30 will test that expectation.

Analysts note that snapback growth hinges partly on consumer strength, which softened in Q1. If spending rebounds, the economy may return to solid growth. If consumer caution persists, the rebound could prove weaker.

Bottom Line

The revised Q1 GDP report underscores how volatile trade behavior—especially ahead of potential tariffs—can distort short-term economic data. With imports now expected to normalize, the underlying foundations of the U.S. economy (domestic spending, investment) will play a more significant role heading into summer. The key for policymakers and investors is whether consumer and private sector momentum can regain strength. A strong Q2 could affirm resilience, while a weaker result may heighten recession concerns.