The U.S. economy contracted at an annualized rate of 0.5 percent in the first quarter of 2025, according to the third estimate (BEA).
U.S. Economy Contracts Sharply in Q1 2025
The U.S. economy contracted at an annualized rate of 0.5 percent in the first quarter of 2025, according to the third estimate from the U.S. Bureau of Economic Analysis (BEA). This marks a significant revision from the previous estimate of –0.2 percent, and is the first quarterly contraction since early 2022.
The downward revision was driven mainly by a surge in imports and slumping federal spending, outweighing modest gains in consumer spending and business investment.
Imports surged approximately 37.9%, subtracting nearly 4.7 percentage points from GDP, by far the biggest drag on growth. The rally in imports was largely driven by firms and consumers front-loading purchases ahead of new tariffs, particularly on Chinese and steel products, amplifying the trade deficit.
Exports were revised down in the third estimate, but weren't as central to the contraction. The broader drop centered on import-driven trade balance shifts.
PCE slowed to 0.5% annualized growth, revised down from 1.2%, representing the weakest consumer pace since early 2022 as high interest rates, elevated inflation (3.7% PCE index), and increased household debt are weighing on spending power.
Total government spending also declined 4.6%, led by a steep drop in federal outlays, the biggest quarterly decline since early 2022 drived by expiring pandemic-era funding, federal budget constraints, and lagging discretionary expenditures.
Gross private domestic investment contributed positively, rising at its fastest pace since mid-2023, though slightly below earlier estimates as firms continue committing capital to areas like automation and energy, signaling confidence in select long-term trends.
Recession concerns: Two straight quarters of negative GDP would typically signal recession. Q2 results (due late July) will be closely watched.
Fed policy challenges: With inflation still elevated and consumer weakness clear, the Fed faces a tightrope: inflation control vs. growth support.
Market sentiment: Earnings in consumer-dependent sectors may weaken, and equities could remain volatile.
The Q1 contraction stems less from consumer or business pullbacks and more from a one-time import surge, fading federal spending, and sluggish exports. While underlying investment and private demand show resilience, growth risks remain tilted to the downside. With Q2 data and upcoming Fed moves ahead, investor and policymaker attention will remain sharply focused.
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