The U.S. economy contracted in the first quarter, weighed down by a deluge of goods imported by businesses eager to avoid higher costs, underscoring the disruptive nature of President Donald Trump's often chaotic tariff policy.
The decline was driven by a large surge in imports, which are a subtraction in the calculation of GDP. Imports surged at an annualized rate of 41.3% in the first quarter as companies front-loaded orders ahead of anticipated tariffs from the Trump administration. The surge in imports was good for a -5% contribution to the GDP calculation in the first quarter.
Final sales of goods to domestic purchasers, another sign of demand in the economy, grew at a 3% annualized rate in the first quarter, above the 2.9% seen in the fourth quarter of 2024.
"Trade was a huge influence," PNC Financial Services Group chief economist Gus Faucher told Yahoo Finance. "We saw companies bringing in a lot of imports to try to get ahead of tariffs. We saw a huge build in inventories. But when you look at underlying demand consumer spending growth, that was still pretty solid."
The "core" Personal Consumption Expenditures index, which excludes the volatile food and energy categories, grew by 3.5% in the first quarter, above estimates for 3.2% and above the 2.6% seen in the prior quarter.
The report measures economic activity through the first three months of the year ending in March, meaning it covers how the US economy functioned ahead of President Trump's tariffs but not after the president's April 2 announcements that increased the effective tariff rate to its highest level in more than a century.
Economists and the Federal Reserve have been anticipating tariffs to push inflation higher and weigh on economic growth in the coming quarters.
"Overall this is indicating that tariffs are having an impact on the economy, that it's been negative so far in 2025," Faucher said. "And they're likely to remain negative through the rest of this year."
Stock futures fell following the release as investors digested the quarterly economic growth update and a weaker-than-expected reading of private payroll additions for April. Data from ADP showed private payrolls grew by just 62,000 in April, far fewer than the 115,000 economists expected.
The benchmark S&P 500 (^GSPC) slid 1.4%, while the tech-heavy Nasdaq Composite (^IXIC) dropped around 2.1%.
The Dow Jones Industrial Average (^DJI) sank 0.8% after the blue-chip index notched its longest win streak of 2025.