The U.S. economy contracted at an annualized rate of 0.2% in the first quarter, falling short of expectations due to weakened consumer spending and increased imports. Although this figure represents a slight upward revision from the preliminary estimate of a 0.3% decline, it still indicates an economic contraction at the start of the year. The revision was partly attributed to stronger business investment and increased inventory accumulation.
According to the second revised data released by the Bureau of Economic Analysis on Thursday, the updated real GDP showed a 0.2% decline compared to the expected 0.3% and the initial 0.3% drop. The core PCE price index rose 3.4%, slightly below the anticipated 3.5%. The initial data released in late April revealed a 0.3% contraction—the first since 2022—driven by pre-tariff import surges and soft consumer spending, marking the early ripple effects of Trump’s tariff policies. The upward revision in GDP was supported by a 10.3% increase in business investment (up from the initial 9.8%) and a smaller drag from federal government spending. However, consumer spending growth was sharply downgraded to 1.2%, well below the expected 1.8%, marking the weakest pace in nearly two years. Weaker demand for automobiles and reduced spending on services like healthcare and insurance reflected underlying softness in demand. Net exports subtracted 4.9 percentage points from GDP—the largest drag on record—slightly worse than initial estimates. This was primarily due to a 42.6% surge in imports (revised up from 41.3%) as businesses rushed to avoid potential tariffs. Ironically, while the Trump administration claimed trade policies would boost long-term growth by revitalizing domestic manufacturing, the tariff threats instead triggered an import surge that contributed significantly to economic contraction. Although the White House later rolled back or delayed some tariffs and courts blocked others, current tariff levels remain substantially higher than pre-Trump levels.Corporate profits plunged 2.9%, the largest decline since 2020, after a 5.4% increase in the fourth quarter. Another key indicator of economic activity, Gross Domestic Income (GDI), also fell by 0.2%, marking the first decline since the end of 2022. Many companies, including the world’s largest retailer Walmart, have warned that consumers will soon see price increases, indicating that businesses are facing significant cost pressures that will eventually be passed on to consumers.
Thursday’s data also revealed that underlying demand in the U.S. economy was weaker than initially expected in the first quarter. “Sales to domestic private final purchasers,” a measure considered by economists as a key indicator of economic health excluding inventories and government purchases, grew by only 2.5%, the slowest pace in nearly two years. Uncertain inflation prospects have left the Federal Reserve in a dilemma. The GDP report showed that the personal consumption expenditures price index excluding food and energy, the Fed’s preferred inflation gauge, rose 3.4% at the beginning of the year, slightly lower than the initial estimate. The upcoming April PCE data on Friday will provide more clues about actual consumer spending and wage growth at the start of the second quarter. Despite recent reports showing moderating inflation, Fed officials remain vigilant about a resurgence in price pressures. In last night’s meeting minutes, Fed policymakers described the uncertainty in the economic outlook as “exceptionally high” and reiterated their full capacity to wait for clearer economic and inflation prospects before acting; “almost all” mentioned the risk of more persistent inflation. Forecasters generally expect a rebound in second-quarter GDP, as higher tariffs will curb imports, and already imported goods will accumulate into larger inventories, supporting growth. However, in the long run, how Trump’s trade, immigration, and tax policies will affect consumer and business spending will remain a focus for economists and policymakers. Market reaction: Following the release of U.S. economic data, U.S. Treasury yields fell briefly, with the 30-year and 10-year yields both dropping more than 1 basis point to 4.965% and 4.469%, respectively. Risk warning and disclaimer: The market carries risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article suit their particular circumstances. Investments made accordingly are at the investor’s own risk.
