The U.S. economy shrank at the start of 2025, marking the first contraction in three years and raising new concerns about growth, prices, and policy.
According to the Bureau of Economic Analysis, gross domestic product declined at an annualized rate of 0.3% in the first quarter — a sharper drop than the 0.2% slide forecast by economists. That’s a significant reversal from the 2.4% growth logged in the final quarter of 2024.
This downturn was largely driven by a surge in imports, which subtracted five full percentage points from the GDP calculation, as businesses rushed to bring in goods ahead of aggressive new tariffs imposed by the Trump administration. The downturn comes just as inflation remains high, complicating the Federal Reserve’s efforts to guide the economy.
Inflation Pressure and Policy Crossroads
The inflation picture added to the unease. The Fed’s preferred core inflation metric — the Personal Consumption Expenditures (PCE) index, excluding food and energy — rose 3.5% in the first quarter, well above the 2.6% pace from the prior quarter. While March data showed some easing, the broader quarterly trend highlights persistent pricing pressure.
With inflation above expectations and growth now sliding, the Fed faces a policy dilemma: cooling inflation could mean tightening further and risking more economic damage, while supporting growth could fuel higher prices. “This type of data won’t soothe the markets, and it won’t make the Fed’s job any easier,” said Ellen Zentner, chief economist at Morgan Stanley Wealth Management.
Fed Chair Jerome Powell recently acknowledged the mounting tension between the central bank’s goals of price stability and full employment, especially as new tariffs raise costs and undermine business confidence. President Trump has continued to push the Fed to lower interest rates — a call he repeated this week at a rally in Michigan.
Tariffs, Trade, and Troubled Supply Chains
The downturn’s timing is no coincidence. Much of the contraction stems from changes in trade policy. The administration’s 145% tariff on Chinese imports, enacted in April, triggered a rush in orders before the hike and a steep drop in shipping activity afterward. Port of Los Angeles officials report a collapse in inbound cargo and warn of shrinking inventory levels for retailers in the weeks ahead.
“There’s a real disruption underway,” said Gene Seroka, executive director of the Port of L.A. “Retailers have maybe five to seven weeks of full inventory left.”
This shakeup in trade is already being felt by companies like Shein, which is restructuring its U.S. operations to cope with the tariffs. Meanwhile, China has quietly begun exempting select American products from its own 120% retaliatory duties — moves that suggest it may be seeking to ease the standoff without public concessions.
Recession Fears Grow as Markets React
While some economists, like those at Oxford Economics, stress that the economy is not yet in a recession, others are less optimistic. “I expect the U.S. economy to slip into a recession in the second quarter,” said Luke Tilley of Wilmington Trust. "Underlying demand doesn’t look all that solid."
Markets reacted with concern. The S&P 500 dropped 0.8% on the day of the GDP release, with the Nasdaq falling more than 1%. Private payroll growth also missed expectations in April, coming in at just 62,000 new jobs, well below forecasts.
For families and businesses, the consequences could soon hit home. Shoppers may face fewer choices and higher prices, while employers in shipping, logistics, and retail could be forced to cut back. The risk now is that the combined weight of weaker growth, elevated inflation, and trade disruption might shift the economy from a slowdown into a full downturn.
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