US economy shrank 0.5 per cent from January to March, worse than estimated

The US economy shrank at a 0.5 per cent annual pace from January through March as President Donald Trump's trade wars disrupted business, the commerce department reported on Thursday, 26 June, in a downgrade from its previous estimate.

First-quarter growth sank under a surge of imports as companies in the United States rushed to bring in foreign goods before Trump could impose tariffs on them. The commerce department had previously estimated that the economy fell 0.2 per cent in the first quarter.

The January–March drop in gross domestic product — the nation's output of goods and services — reversed a 2.4 per cent increase in the last three months of 2024 and marked the first time in three years that the economy contracted. Imports expanded 37.9 per cent, the fastest since 2020, and pushed GDP down by nearly 4.7 percentage points. Consumer spending also slowed sharply.

And federal government spending fell at a 4.6 per cent annual pace, the biggest drop since 1986.

Trade deficits reduce GDP. But that's just a matter of mathematics. GDP is supposed to count only what's produced domestically, not stuff that comes in from abroad.

So imports — which show up in the GDP report as consumer spending or business investment — have to be subtracted out to keep them from artificially inflating domestic production.

The first-quarter import influx likely won't be repeated in the April–June quarter and therefore shouldn't weigh on GDP.

In fact, economists expect second-quarter growth to bounce back to 3 per cent in the second quarter, according to a survey of forecasters by the data firm FactSet.

Thursday's report was the commerce department's third and final report on first-quarter growth.

The first look at April–June GDP growth is due 30 July.