The U.S. economy unexpectedly contracted in the first quarter of 2025, posting its first negative growth reading since the second quarter of 2022 as Donald Trump’s newly imposed trade tariffs sent shockwaves through multiple sectors.
Gross domestic product declined by 0.3% on an annualized basis during the January–March period, marking a sharp reversal from the 2.4% growth recorded in the final quarter of 2024. The reading fell short of analyst expectations, which had forecast a modest slowdown to 0.4% growth.
The decline in real GDP during the first quarter was mainly driven by a surge in imports—subtracted from GDP calculations—and a pullback in government spending.
The U.S. economy posted the largest goods trade deficit ever in March, following the second- and third-largest monthly deficits on record in January and February, respectively, as importers accelerated foreign purchases in anticipation of tariffs.
At the same time, spending reductions by the Elon Musk-led Department of Government Efficiency (DOGE) contributed further downward pressure on economic output.
“These movements were partly offset by increases in investment, consumer spending, and exports,” the Bureau of Economic Analysis wrote.
Price pressures intensified in the first quarter, reinforcing concerns over a potential stagflation scenario.
The price index for gross domestic purchases rose 3.4%, accelerating from a 2.2% increase in the previous quarter.
The personal consumption expenditures (PCE) price index—a key inflation gauge closely watched by the Federal Reserve—climbed 3.6%, up from 2.4% in the fourth quarter.
Core PCE, which excludes volatile food and energy components, rose 3.5% after a 2.6% gain in the prior quarter, signaling persistent underlying inflation even as growth slows.
Earlier in the day, eurozone GDP data surprised to the upside, showing an expansion of 0.4% quarter-over-quarter, double the 0.2% growth economists had predicted.
Weak Labor Market Signals Emerge
In a separate economic release, Automatic Data Processing Inc. reported that U.S. private employers added just 62,000 jobs in April, the weakest figure since July 2024.
That outcome marked a notable slowdown from March’s 155,000 new jobs and missed economists’ expectations of 108,000.
Service-providing industries added 34,000 jobs, while goods-producing industries added 26,000.
“Unease is the word of the day. Employers are trying to reconcile policy and consumer uncertainty with a run of mostly positive economic data. It can be difficult to make hiring decisions in such an environment,” said ADP chief economist Nela Richardson.
While ADP’s private payroll data is not always a perfect proxy for the government’s official employment numbers, the April report adds to signs of a cooling labor market.
The Bureau of Labor Statistics will release its April Employment Situation Report on Friday, with nonfarm payrolls projected to rise by 130,000, down sharply from 228,000 in March.
Market Reactions
The U.S. dollar remained broadly steady across major currencies, with the euro-dollar exchange rate trading at 1.1370, down 0.1% on the day.
U.S. Treasury yields snapped the seventh consecutive session of declines, with the 10-year yield inching up to 4.19%.
Stock futures suffered losses as investors speculated that signs of economic softness could weaken corporate profits.
Futures on the S&P 500 fell 0.8%, while contracts tied to the tech-heavy Nasdaq 100 tumbled 1.4% by 8:36 a.m. ET.
On Tuesday, the SPDR S&P 500 ETF Trust SPY closed 0.6% higher, fully recovering the losses incurred following Trump’s tariff announcement on April 2.
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