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The US economy shrank at a 0.3% annualized pace in Q1 2025 as a record 41.3% surge in imports ahead of new Trump administration tariffs subtracted more than five percentage points from growth, Commerce Department data showed Wednesday.
Consumer spendingresponsible for roughly 70% of GDPcooled sharply to 1.8% growth, its weakest since mid-2023 and down from 4% the prior quarter, while federal outlays fell 5.1%, compounding the drag on activity. In contrast, business investment jumped 9.8% as firms front-loaded equipment purchases before duty hikes, and exports rose a modest 1.8%.
The personal consumption expenditures price index climbed to 3.6% year-on-year, up from 2.4% in Q4, underscoring persistent inflation that could complicate the Federal Reserve's path to cuts.
Early reaction from markets was swift: the Dow plunged over 600 points (1.5%), the S&P 500 slid 1.8% and the Nasdaq fell 2.25%, while ADP's report of just 62,000 private-sector jobs added in Aprildown from 147,000 in Marchadded to concerns about a slowing labor market.
President Trump deflected blame from his tariffs, tweeting that the contraction reflects a Biden Overhang but promising a coming boom once the boom begins, it will be like no other.
Investors should care because this rare contractionits first since early 2022highlights how trade policy can ripple through real activity, and it raises the odds that the Fed will pause on rate cuts as it weighs sticky inflation and tepid consumer demand.
With Q2 GDP due in late July and the Fed's May meeting minutes ahead, markets will be watching for signs that import patterns normalize, consumer and government spending stabilize, and inflationary pressures ease before the next policy pivot.
This article first appeared on GuruFocus.