US Economy Shrinks 0.5% Amid Weak Consumer Spending

First-Quarter GDP Decline and Revised Estimates

The U.S. economy contracted at an annualized rate of 0.5% in the first quarter, according to the Commerce Department's revised data. This marks a sharp downward revision from the previously reported 0.2% decline. The primary drivers of this contraction were weak consumer spending and significant trade deficits. Consumer spending, which accounts for roughly two-thirds of GDP, grew at a meager 0.5% during the quarter, down from an earlier estimate of 1.2%. This represents the slowest growth in consumer spending in several years. Additionally, trade deficits surged as imports outpaced exports, further weighing on the overall economic output.

Key Drivers Behind the Economic Contraction

One major contributor to the economic shrinkage was the rush by businesses to stockpile imported goods ahead of anticipated tariffs under the Trump administration. This surge in imports inflated trade deficits, which subtracted nearly 4.7 percentage points from GDP. Imports expanded by a staggering 37.9% during the quarter, the fastest pace since 2020. On the fiscal side, federal government spending fell by 4.6%, marking the most significant drop since 1986. This decline in government expenditure, coupled with subdued domestic demand, compounded the challenges for overall economic growth during the period.

Outlook for Economic Recovery

Despite the disappointing performance in the first quarter, economists remain optimistic about a rebound in the second quarter. Growth is projected to accelerate to an annualized rate of 3%, according to a consensus forecast from FactSet. Key factors supporting this recovery include a stabilization in imports and a gradual improvement in consumer spending. Additionally, businesses are expected to adjust to the new tariff landscape, potentially easing trade-related pressures. However, economists caution against interpreting the anticipated rebound as a signal of sustained economic strength, given ongoing uncertainties in labor markets and housing data.