US GDP unexpectedly contracts in the first quarter

The U.S. economy contracted at an annualized rate of 0.3% in the first quarter of 2025, marking the first decline in GDP since the early days of 2022 and signaling potential headwinds for the broader recovery.

US GDP unexpectedly contracts in the first quarter

This sharp reversal from the 2.4% growth recorded in the previous quarter came as a surprise to markets, which had anticipated a modest 0.3% expansion, according to the advance estimate from the Bureau of Economic Analysis. A key driver of the contraction was a substantial 41.3% surge in imports — the steepest in over a decade — as businesses and consumers front-loaded purchases in anticipation of rising prices due to a wave of new tariffs imposed by the Trump administration. This front-loading inflated the trade deficit and subtracted significantly from headline GDP. At the same time, consumer spending, which accounts for nearly 70% of U.S. economic activity, slowed markedly to 1.8% — the weakest pace since the second quarter of 2023. Elevated borrowing costs, persistent inflation in core services, and growing uncertainty over the policy outlook weighed on household sentiment and restrained discretionary purchases. Government spending also dragged on growth, with federal expenditures falling 5.1%, the steepest quarterly drop in three years, largely due to reduced defense outlays and the expiration of several pandemic-era support measures.

Fixed investment jump

In contrast, fixed investment provided a rare bright spot, jumping 7.8% — the most robust increase since Q2 2023 — fueled by a surge in non-residential construction and equipment purchases as firms accelerated capital deployment to offset rising input costs and supply chain volatility. Despite this strength, the broader contraction reflects mounting macroeconomic imbalances and underscores the fragility of growth amid heightened geopolitical risks and tightening trade dynamics.