US economy shrank more than initially estimated in Q1

The United States economy shrank at a 0.5 per cent annual pace in the March quarter, as the trade wars launched by US President Donald Trump disrupted business, the US Commerce Department reported on Thursday, in an unexpected deterioration of earlier estimates.

The economy was weighed down by a surge of imports as US companies, and households, rushed to buy foreign goods before the imposition of Trump’s tariffs.

The Commerce Department previously estimated that the economy fell 0.2 per cent in the first quarter. Economists had forecast no change in the department’s third and final estimate.

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, fastest since 2020, and pushed GDP down by nearly 4.7 percentage points.

Consumer spending also slowed sharply, expanding just 0.5 per cent, down from a robust 4 per cent in the fourth quarter of last year. It is a significant downgrade from the Commerce Department’s previous estimate.

Consumers have turned jittery since Trump started plastering big taxes on imports, anticipating that the tariffs will impact their finances directly.

And the Conference Board reported this week that Americans’ view of the US economy worsened in June, resuming a downward slide that had dragged consumer confidence in April to its lowest level since the COVID-19 pandemic five years ago.

The Conference Board said on Tuesday that its consumer confidence index slid to 93 in June, down 5.4 points from 98.4 last month. A measure of Americans’ short-term expectations for their income, business conditions and the job market fell 4.6 points to 69. That’s well below 80, the marker that can signal a recession ahead.

Former Federal Reserve economist Claudia Sahm said “the downward revision to consumer spending today is a potential red flag”. Sahm, now chief economist at New Century Advisors, noted that Commerce downgraded spending on recreation services and foreign travel – which could have reflected “great consumer pessimism and uncertainty”.

A category within the GDP data that measures the economy’s underlying strength rose at a 1.9 per cent annual rate for January to March. It’s a decent number, but down from 2.9 per cent in the fourth quarter of 2024 and from the Commerce Department’s previous estimate of 2.5 per cent for January-March growth.

This category includes consumer spending and private investment but excludes volatile items like exports, inventories and government spending.

Federal government spending fell at a 4.6 per cent annual pace, the biggest drop since 2022.

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 growth to bounce back to 3.0 per cent in the second quarter, according to a survey of forecasters by the data firm FactSet.

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

AP