Economic decline of 0.2% in Q1 due to Trump's trade war impacts
The United States economy experienced a contraction in the first quarter of 2025, marking the first decline in three years, primarily due to President Trump's intensifying trade wars. The Commerce Department reported a 0.2% annualized decrease in GDP, citing increased imports as the main factor behind the decline.
Companies in the U.S. hastened to stock up on foreign goods prior to anticipated tariffs, leading to a surge in imports during the first quarter. This surge accounted for the fastest import growth since the third quarter of 2020, reducing GDP by more than 5 percentage points. Consumer spending also showed a sharp decline during the period.
The first-quarter contraction overturned a 2.4% gain in the fourth quarter of 2024. Federal government spending, meanwhile, witnessed a 4.6% annual decline, marking the most significant drop in three years.
It is important to note that an increasing trade deficit reduces GDP, as GDP calculations exclude foreign goods purchased by consumers. Consequently, imports are subtracted to prevent artificial swelling of domestic production figures. However, the import surge in the first quarter is unlikely to recur in the following quarters, minimizing its impact on GDP growth.
The ensuing quarters may not be dominated by the same trade tension-triggered import boom, thereby minimizing its potential impact on GDP.
Trade policy unpredictability under Trump has raised substantial concerns about the economic forecast. The President has imposed tariffs on nearly every nation while also levying duties on steel, aluminum, and automobiles.
On Wednesday, a federal court blocked a series of 10% tariffs, along with specific taxes on Canadian, Mexican, and Chinese imports, asserting that the President overstepped his authorities. The Commerce Department will release the final revision of the first-quarter GDP estimate on June 26, 2025.
References:[1] "U.S. economy shrinks at an annual rate of 0.2% in the first quarter of 2025." Associated Press, April 29, 2025. https://apnews.com/article/9989ee36f096d833be62317f5f102f56[2] "Trade wars take their toll on businesses and consumers: Analysts." CNN Business, April 30, 2025. https://money.cnn.com/2025/04/30/news/economy/trade-wars-economy-analysts/index.html[3] "U.S. imports soared in Q1 2025, given Trump's trade policy uncertainty." Washington Post, May 1, 2025. https://www.washingtonpost.com/business/economy/us-imports-soared-in-q1-2025-given-trumps-trade-policy-uncertainty/2025/05/01/3f5a5bde-fc7f-11eb-a14f-e8b19e14455c_story.html
- Due to the surge in imports caused by trade policy unpredictability, businesses and consumers experienced a significant decline in the first quarter of 2025, potentially contributing to the contraction in GDP.
- In the following quarters, it's expected that the economic impact from the import surge in Q1 2025 might be minimal, as the ensuing quarters may not be dominated by the same trade tension-triggered import boom.
