US economy contracts for first time in three years, as tariff disruption dents consumer sentiment, shakes economic foundation

A trader works on the floor of the New York Stock Exchange in New York City. File photo: VCG

The US economy posted its first contraction in three years, data from US Bureau of Economic Analysis (BEA) showed on Thursday (US time). Chinese and foreign experts said the latest data is a further indication of the damage of the tariffs imposed by the US administration that has on the US economy, as tariffs dented consumer sentiment – a core foundation of the US’ consumption-led economy.

Real GDP decreased at an annual rate of 0.5 percent in the first quarter, a downward revision of 0.3 percentage point from the previous estimate, primarily reflecting downward revisions to consumer spending and exports that were partly offset by a downward revision to imports, according to the third estimate released by the US BEA on Thursday. On a quarterly basis, that reflected a 0.1 percent decrease.

The decrease in real GDP in the first quarter primarily reflected an increase in imports, which are a subtraction in the calculation of GDP, and a decrease in government spending, the BEA noted.

According to Reuters, the data contracted “a bit faster than previously thought in the first quarter amid tepid consumer spending, underscoring the distortions” caused by the US administration’s aggressive tariffs on imported goods.

Despite the BEA’s emphasis on the rise of imports that happened [as importers rush to stock up inventories] during the period, a Chinese economist said much of the downward pressure likely comes from dented consumer sentiment. 

“What the data really tells is that consumer sentiment is already being damaged by the tariffs on imports and the ripple effects it caused, as well as by a rising uncertainty in US trade policies,” Hu Qimu, deputy secretary-general of the Forum 50 for Digital-Real Economies Integration, told the Global Times on Friday.

The January-March drop in GDP reversed a 2.4-percent-increase in the last three months of 2024 and marked the first time in three years that the economy contracted,according to AP. Also, in a “significant downgrade” from previous estimate, consumer spending also slowed sharply, expanding just 0.5 percent, down from a robust 4 percent in the fourth-quarter of last year.

The US economy is predominantly consumption-driven, and dented consumer sentiment as a result of the US administration’s unpredictable tariff policies is, to a large extent, behind the drop in US GDP, Hu said, noting the tariffs’ impact on US jobs and inflation.

As for data for the second quarter, Hu said the situation cannot be optimistic as the US administration’s “reciprocal tariffs” wreak havoc during the quarter.

At the 16th Annual Meeting of the New Champions, also known as the Summer Davos, in North China’s Tianjin, Robert Koopman, Hurst Senior Professional Lecturer with the School of International Service of American University and former Chief Economist at the WTO, told the Global Times that the negative impact of the US administration’s tariffs on the US’ own economy has already emerged, as “most people see slowing economic growth in the US.”

Tariffs raise prices for American consumers or reduce profitability of American firms, as only a very small amount of the tariffs imposed by the US government gets absorbed by foreign exporters, Koopman said.

The US Conference Board said Tuesday that its consumer confidence index slid to 93 in June, down 5.4 points from 98.4 last month, as Americans’ view of the US economy worsened in June, the AP reported. In April, the index dropped to its lowest level since the pandemic five years ago, according to the report. 

A number of Chinese exporters have also told the Global Times that one of the direct consequences of the US tariffs will be US consumers slashing back on spending as importers absorb the tariffs and try to pass it on to consumers.

“The tariff hikes have caused many households to postpone their plans to build or refurnish their homes and cancel their purchases,” Li Feng, senior vice president with Hangzhou GreatStar Industrial, one of the world’s leading hand tool companies, told the Global Times.

The US GDP data came as the China Council for the Promotion of International Trade (CCPIT), China’s trade promoting body, warned of rising global trade frictions.

The global economic and trade friction index stood at 131 in April, continuing to rise, a CCPIT spokesperson told a press conference on Friday, noting that US’ “reciprocal tariffs” and multiple restrictive measures introduced were the main reasons for the continued increase of the index.

In April, the total value involved in global trade friction measures surged by 37.6 percent year-on-year and rose by 16 percent month-on-month, CCPIT said. Among them, the global import and export tariff measures index increased by 89 points year-on-year.