US GDP Contracts 0.5% In Q1 Amid Weak Spending, Rising Imports

The U.S. economy shrank in the first quarter of 2025, with real GDP falling at an annual rate of 0.5%, according to the third and final estimate from the Bureau of Economic Analysis – a downgrade from the previous estimate of a 0.2% decline and marking its worst quarterly performance since early 2023.

However, the data did not deter the gains seen in U.S. equity markets on Thursday morning. The S&P 500 (SPX) is on track to hit its highest level this year. Its corresponding ETF, the SPDR S&P500 ETF (SPY) gained 0.5% in intraday trade.

The drop follows a 2.4% increase in GDP in the fourth quarter of 2024. The agency said the contraction was primarily due to a surge in imports, which subtract from the GDP, and a decline in government spending of 4.6%.

Reports indicate that there has been a rise in imports as companies race to beat the potential tariff increases ahead of the Aug. 12 deadline set by U.S. President Donald Trump for a trade deal with China.

These drags more than offset gains in business investment and consumer spending, which also came in weaker than initially estimated.

The decline was led by private goods-producing industries, like manufacturing, which fell 2.8% and private services industries, which dropped 0.3%.

Real final sales to private domestic purchasers, which is the sum of consumer and business spending, were revised down by 0.6% to a 1.9% increase, showing weaker momentum than earlier thought.

The report also pointed to persistent inflation pressures, with the gross domestic purchases price index rising 3.4%. The core personal consumption expenditures (PCE) price index, the Federal Reserve’s preferred inflation measure, rose 3.5%, up slightly from the prior estimate.

Fed Chair Jerome Powell, testifying to Congress, acknowledged uncertainty around the inflationary effects of tariffs earlier this week, advocating for a wait-and-watch approach. “The question is, who’s going to pay for the tariffs? And honestly, it’s very hard to predict that in advance,” he said.

President Trump has repeatedly called on ‘Too Late’ Powell to cut rates and recently told reporters in The Hague that he is weighing a shortlist of replacements for the Fed chief. “I know within three or four people,” Trump said.

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