US economy shrinks in first months of ’25

The U.S. 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 Trump imposed massive tariffs.

The January-March drop in gross domestic product — 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 5 percentage points off first-quarter growth. Consumer spending also slowed sharply — from 4% to 1.8% growth in October-December last year. Federal government spending plunged 5.1% in the first quarter.

In the wake of the report, Trump on Wednesday acknowledged that his tariffs could result in fewer and costlier products in the United States, saying American kids might “have two dolls instead of 30 dolls,” but he insisted China will suffer more from his trade war.

The Republican president has tried to reassure a nervous country that his tariffs will not provoke a recession.

Trump was quick to blame his Democratic predecessor, former President Joe Biden, for any setbacks while telling his Cabinet that his tariffs meant China was “having tremendous difficulty because their factories are not doing business,” adding that the U.S. did not really need imports from the world’s dominant manufacturer.

“You know, somebody said, ‘Oh, the shelves are going to be open,'” Trump continued, offering a hypothetical. “Well, maybe the children will have two dolls instead of 30 dolls. So maybe the two dolls will cost a couple bucks more than they would normally.”

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. The Dow Jones tumbled 400 points at the opening bell shortly after the GDP numbers were released. The S&P 500 dropped 1.5% and the Nasdaq composite fell 2%.

Trump pointed his finger at Biden as the cause as more details of the gross domestic product report came out.

“This is Biden’s Stock Market, not Trump’s,” the Republican president, who took office in January, posted on his social media site. “Tariffs will soon start kicking in, and companies are starting to move into the USA in record numbers. Our Country will boom, but we have to get rid of the Biden ‘Overhang.’ This will take a while, has NOTHING TO DO WITH TARIFFS.”

The surge in imports — 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.

ECONOMY SOLID AT YEAR’S START

Trade deficits reduce GDP, but that’s more related to mathematics. GDP is supposed to count only what’s produced domestically. So imports — which the government counts as consumer spending in the GDP report when you buy items like Swiss chocolates — have to be subtracted out to keep them from artificially inflating domestic production.

And other aspects of Wednesday’s GDP report suggested that the economy looked solid at the start of the year.

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 like exports, inventories and government spending.

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

“We think the downturn of the economy will get worse in the second half of this year,” wrote Carl Weinberg, chief economist at High Frequency Economics. “Corrosive uncertainty and higher taxes — tariffs are a tax on imports — will drag GDP growth back into the red by the end of this year.”

Wednesday’s report also showed an increase in prices that is likely to worry the Federal Reserve which is still trying to cool inflation after a severe pandemic run-up. The Fed’s favored inflation gauge — the personal consumption expenditures, or PCE, price index — rose at an annual rate of 3.6%, up from 2.4% in the fourth quarter. Excluding volatile food and energy prices, so-called core PC inflation registered 3.5%, compared with 2.6% from October-December. The central bank wants to see inflation at 2%.

The first-quarter GDP numbers “highlight the bind that the Federal Reserve is in,” Ryan Sweet of Oxford Economics wrote in a commentary. The Fed must weigh whether to cut interest rates to support economic growth or leave rates high because of elevated inflation. “The economy was essentially stagnant in the first three months of the year while growth in headline and core inflation accelerated, fanning concerns of stagflation.”

Trump inherited a solid economy that had grown steadily despite high interest rates imposed by the Fed in 2022 and 2023 to fight inflation. His erratic trade policies — including 145% tariffs on China — have paralyzed businesses and threatened to raise prices and hurt consumers.

Trump highlighted the positive aspects of the GDP report at a Wednesday Cabinet meeting. But that session revealed how his administration is also trying to take credit for policies that involve the Biden administration.

Commerce Secretary Howard Lutnick talked about his recent trip to Arizona to see the Taiwan Semiconductor Manufacturing Co.’s computer chip factories. The company notes on its website that it announced plans in May 2020, during Trump’s first term when the coronavirus pandemic disrupted the global economy, to build its first plant in Arizona. The company announced a second factory in December 2022, when Biden was in office. After getting up to $6.6 billion in commitments in 2024 from the bipartisan CHIPS and Science Act, TSMC announced plans for a third plant.

Trump dismissed the importance of the government support that Biden made possible for computer chip factories to open domestically.

“They’re building because of the tariffs,” Trump said.

Democrats were quick to blame Trump for disrupting several years of solid economic growth. Democratic Sen. Elizabeth Warren of Massachusetts said: “100 days into his presidency, Donald Trump’s red-light, green-light tariffs are shrinking our economy, with businesses stockpiling imports in anticipation of tariff doomsday.”

A top House Democrat, Rep. Suzan DelBene of Washington state, said that “we’ve only seen the beginning of the dangerous impacts from Trump’s random policies.” She noted that U.S. manufacturers still depend on parts and components from China to assemble final goods and said Trump’s approach to trade reflected a misunderstanding of the investment and certainty that domestic companies need in order to construct more factories and create jobs.

“Chaos and dysfunction are not going to help build investment,” said DelBene, who leads the House Democrats’ congressional campaign efforts. “A strong economy needs stability and certainty. We haven’t seen that.”

“In just 100 days, President Trump has taken the U.S. economy from strong, stable growth to negative GDP,” said Heather Boushey, a former member of Biden’s White House Council of Economic Advisers. “This astonishing turn of fortune is directly due to the incoherence of his economic policy and his mismanagement of federal policy more generally.”

But White House trade adviser Peter Navarro told reporters that the GDP drop was a “one-shot deal” because of the increased imports, which mathematically subtract from the measure of economic activity. Navarro said that the individual and business income tax cuts planned by Trump would help growth in the months ahead.

“All we’re seeing is good, strong news,” Navarro said. “So the idea that there’s a recession coming should be heavily discounted.”

The GDP report landed as Trump sought to put the focus on new corporate investments in the U.S. as he spends the week celebrating his 100th day in office. He delivered remarks on Wednesday afternoon and called out investments from companies such as Nvidia, Soft Bank, Apple, Johnson & Johnson and others that he said reflected the coming prosperity.

JOB MARKET WEAKENING

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

On Wednesday, payroll provider ADP reported 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, which arrive Friday.

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.”

Information for this article was contributed by Paul Wiseman, Christopher Rugaber and Josh Boak of The Associated Press.