US economy contracts more than expected in first quarter

The US economy contracted at an annualized rate of 0.5% in Q1 2025, marking a sharper decline than the second estimate of a 0.2% drop and signaling the first quarterly contraction in three years.

This contraction was driven by significant downward revisions to key components of GDP, with consumer spending and exports playing a central role in the weaker-than-expected performance.

Consumer spending, a critical driver of the US economy, rose just 0.5%, marking the slowest pace since the sharp declines of 2020. This was a notable downward revision from the previous estimate of 1.2%. The pullback in consumer spending reflects a combination of inflationary pressures, higher interest rates, and waning confidence among American consumers, who have become more cautious in their spending habits amid economic uncertainties.

Exports also underperformed, growing only 0.4%, far below the initial estimate of 2.4%. The slowdown in exports was driven by weak global demand and continued trade disruptions, with several key trading partners facing their own economic challenges. These declines in consumer spending and exports were only partially offset by a downward revision to imports, which were revised to a 37.9% increase from the earlier estimate of 42.6%.

The surge in imports earlier in the quarter was largely attributed to businesses and consumers rushing to stockpile goods ahead of anticipated price hikes, driven by a series of tariff announcements and fears of supply chain disruptions. This stockpiling behavior added temporary momentum to import growth but also reflected broader concerns about rising inflationary pressures.

Federal government spending also took a hit, dropping 4.6%, the steepest decline since Q1 2022, and aligning with the second estimate. This decline was largely attributed to reduced fiscal outlays as the government scaled back some of its pandemic-era support programs, while tighter fiscal policies also weighed on spending.

On a more positive note, fixed investment rose by 7.6%, marking the strongest gain since mid-2023. However, this was slightly below the 7.8% increase in the early estimate, suggesting that business investment, while resilient, faced some moderation. Despite the overall contraction, the increase in investment indicates continued confidence from businesses in long-term growth prospects, particularly in sectors such as technology, energy, and infrastructure.

The overall picture painted by the Q1 data reflects a US economy facing a delicate balancing act: persistent inflationary pressures, softer consumer demand, and trade headwinds, all against the backdrop of a tightening policy environment.

While the decline in GDP is concerning, the resilience in fixed investment suggests that certain sectors of the economy are still poised for growth, though the path forward remains uncertain as global and domestic challenges persist. Investors and policymakers alike will be closely watching how these trends evolve in the coming quarters, especially as the impact of higher interest rates and geopolitical tensions continue to unfold.