US Economy Shrinks for 1st Time Since 2022 Driven by Record Imports — Evening Brief – 04.30.25 

The U.S. economy contracted for the first time since 2022, with GDP shrinking at an annualized rate of 0.3% in Q1 2025, exceeding economists’ expected 0.2% decline, per the Bureau of Economic Analysis’s advance estimate. This marked a sharp downturn from the 2.4% growth in Q4 2024. The primary drivers were a massive 41.3% surge in imports, particularly goods (up 50.9%), and lower government spending, though increases in investment, consumer spending, and exports provided some offset. 

However, the data wasn’t all gloom given the Atlanta Fed’s latest estimate projecting a steeper -2.7% drop (-1.5% excluding record gold imports). Despite the headline contraction, today’s GDP report showed surprising strength when excluding the two drags: net trade and government spending. 

The headline figure appears misleading due to the unprecedented -4.8% drag from net exports, offset by strong inventory accumulation (+2.3%) and domestic final sales (3.0%). This suggests underlying economic strength despite the trade distortion. 

Meanwhile, inflation surged, with the PCE price index rising 3.6% quarter-on-quarter, up from 2.4%, and the core PCE price index, excluding food and energy, climbing 3.5% from 2.6%. A widening goods trade deficit, reported in March, reflected businesses and consumers stockpiling ahead of anticipated tariff hikes. 

Personal consumption expenditures grew 1.8%, beating the 1.2% forecast but slowing from 4.0% in Q4 2024, marking the weakest rise since Q3 2022. Olu Sonola of Fitch Ratings noted that the weak GDP data gives the Federal Reserve room to delay rate changes, citing tariff-driven purchasing behavior as a source of data noise. Joseph Brusuelas of RSM US emphasized that while the trade deficit dragged GDP down, core GDP (real final sales to domestic private purchases) rose 2.3%, indicating the economy avoided a recession in Q1 2025. 

Separately, the core PCE price index was flat month-over-month in March, below the expected +0.1% and down from February’s revised +0.5%, marking the lowest inflation level in nearly five years. Annually, core PCE rose 2.6%, matching consensus but down from a revised 3.0%. The headline PCE price index, including food and energy, was also flat, aligning with expectations but stalling from a revised +0.4%. Annually, it increased 2.3%, slightly above the 2.2% forecast. 

Consumer spending remained robust, rising 0.7% month-over-month, surpassing the 0.5% expected, likely driven by tariff anticipation. Personal income grew 0.5%, topping the 0.4% forecast but slowing from February’s revised 0.7%. The personal saving rate fell to 3.9% from 4.1%.