US Economy Shrinks for the First Time in 3 Years as Tariff Fears Drive Import Surge

The U.S. economy contracted for the first time in three years during the opening quarter of 2025, as a surge in imports and rising prices disrupted momentum, signaling fresh uncertainty amid growing trade tensions.

According to the Bureau of Economic Analysis, the gross domestic product (GDP) declined at an annualized rate of 0.3% in Q1 — a steeper drop than the 0.2% forecasted by economists surveyed by Bloomberg. This marks a sharp reversal from the 2.4% growth recorded in the final quarter of 2024 and represents the first economic contraction since early 2022.

While the decline raised eyebrows, analysts were quick to point out that it does not necessarily signal a recession. “A quarterly decline during an expansion is unusual but not unprecedented — and the economy is not in a recession,” noted Ryan Sweet, chief U.S. economist at Oxford Economics.

The primary drag on GDP came from a massive 41.3% surge in imports, as businesses rushed to stock up ahead of anticipated tariff hikes under President Donald Trump’s second term. Since imports are subtracted in GDP calculations, this spike alone accounted for a 5% negative contribution to the overall figure.

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Despite the headline contraction, domestic demand remained solid. Final sales to domestic purchasers rose at an annualized rate of 3%, a slight increase from the 2.9% pace seen in the previous quarter, suggesting consumer resilience in the face of inflation and trade headwinds.

“The import surge and inventory build were major players,” explained Gus Faucher, chief economist at PNC Financial Services. “But if you strip that out, underlying consumer demand is still healthy.”

Inflationary pressures also ticked higher. The core Personal Consumption Expenditures (PCE) index, which strips out food and energy prices, rose 3.5% in Q1, exceeding both estimates and the previous quarter’s 2.6% increase. This uptick adds pressure on the Federal Reserve as it navigates rising prices while trying to support economic growth.

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Markets responded negatively to the data. The S&P 500 fell 0.9%, the Nasdaq Composite dropped 1.4%, and the Dow Jones Industrial Average slipped 0.6%, pulling back from its longest winning streak of the year.

Adding to the gloom was a weaker-than-expected private payroll report. ADP data showed just 62,000 new private-sector jobs added in April, far below the 115,000 forecast by economists.

The report covers the period before President Trump’s April 2 announcement that significantly increased tariffs — taking them to their highest levels in more than a century. With these new duties expected to further weigh on trade and consumer prices, economists anticipate continued economic turbulence in the months ahead.

“This is a clear signal that the tariffs are already having a negative effect,” said Faucher. “And that drag is likely to persist through the remainder of 2025.”