Quarterly economic contraction observed during first quarter of the year

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Donald Trump's unpredictable second-term presidency has sent tremors through the economy, causing consumers and businesses to scramble in response to constant tariff threats and policy shifts. The chaos has even pushed economic growth into reverse during Q1 2025, with the U.S. GDP, adjusted for inflation, declining at a 0.3% annual rate.

While the negative figure may seem alarming, it's a misleading snapshot of the economy's health. A closer look at consumer spending and business investment suggests that growth slowed but didn't contract during Q1. However, the tariff-induced uncertainty has left an indelible mark on consumer behavior, with people rushed to buy goods before tariffs took effect, and businesses frantically stockpiling essential items in preparation for the looming trade war.

The unrest in the first quarter was primarily due to an explosion in imports as consumers and businesses sought to beat tariffs. The surge in imports shaved nearly 5 percentage points off GDP growth during Q1. This unexpected decline is a result of the way the data is calculated, as GDP measures only domestically produced goods, not imports. However, the government's estimates for inventories, particularly in preliminary data, didn't quite match the growth in imports, leading to mixed results in inventory figures.

As we move beyond the initial quarter, economists expect spending and investment to slow further as tariffs drive up prices and uncertainty keeps businesses at a standstill. "All of this is going to change," predicts Kathy Bostjancic, chief economist for Nationwide. "Once everything kicks in, we'll have a slower economy, the labor market slowing. Hiring has already stalled, and we expect the unemployment rate to start to rise."

The housing sector, on the other hand, seems to be holding up relatively well, buoyed by record-low mortgage rates and steady demand. But even in real estate, experts warn that an economic downturn could be on the horizon, as extreme uncertainty and a slowing job market take their toll on consumer confidence and overall economic growth.

The trade tensions have also sparked concerns about higher prices, with Americans growing increasingly worried about the impact of tariffs on their pockets. However, it remains to be seen how this anxiety will translate into actual spending patterns in the coming months.

By introducing instability into the economic landscape, Donald Trump's trade policy has left economists predicting a more subdued growth outlook for the rest of 2025. Forecasters warn that sustained uncertainty and trade tensions could cause a sharper slowdown in economic activity and, potentially, lead to a recession.

The longer tariffs remain in place, the more pressure businesses will feel to pass along higher costs to customers, feeding into inflation. Yet, companies may initially absorb some of the cost to protect their customers, but eventually, they will have to reconsider their profitability as tariffs persist.

With a vulnerable economy and potential storm clouds looming on the horizon, economists urge President Trump to reconsider his approach to trade policy, recognizing that the threats to the economy could have long-lasting consequences.

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Overall:

The U.S. economy contracted at a 0.3% annualized rate in Q1 2025, marking its worst performance since early 2022. This reversal from 2.4% growth in Q4 2024 primarily stems from Trump's trade policy maneuvers:

Trade Deficit Surge: Businesses rushed to stockpile imports ahead of anticipated tariffs, causing the goods trade deficit to hit a record high in March. This import surge subtracted from GDP calculations under standard accounting methods.
Corporate Uncertainty: Major companies including Delta, GM, and UPS withdrew financial guidance due to tariff unpredictability. Airlines like Southwest and American Airlines scrapped forecasts as trade tensions created the industry's "biggest uncertainty since COVID."
Broader Economic Risks: While Q1 contraction partly reflects pre-tariff stockpiling, long-term projections warn of deeper damage:
GDP/wage reductions: The Penn Wharton Budget Model estimates Trump's tariffs could reduce long-run GDP by 6% and wages by 5%.
Consumer effects: Lifetime losses of $22,000 for middle-income households are projected. With travel-related losses alone threatening $23B-$71B annually, the industry is bracing for significant upheaval.
Sentiment Decline: Consumer outlooks sank to 2011 lows, while brands face global boycotts and reduced tourism demand due to anti-American sentiment. These dynamics compound risks of a 2025 recession, as cautioned by multiple economists.

Despite the decline in U.S. GDP during Q1 2025, businesses and economists agree that the economy did not contract but slowed down, primarily due to tariff-induced uncertainty that caused consumers and businesses to rush in buying goods and stockpiling essential items.
The unpredictable trade policies of Donald Trump have resulted in a higher trade deficit, as businesses sought to stockpile imports ahead of anticipated tariffs, thereby putting additional pressure on the finance sector.
As trade tensions persist, businesses may temporarily absorb the increased costs due to tariffs to protect their customers, but these costs will eventually impact their profitability and may cause them to pass on the additional expenses to consumers, potentially leading to inflation.
In the midst of trade uncertainties and a potentially vulnerable economy, economists urge President Trump to reconsider his approach to trade policy, recognizing that the long-lasting consequences could cause a more subdued growth outlook for the rest of 2025 and even potentially lead to a recession.