GDP Shrinks in 1st Quarter – What Americans Should Know
Presented by Marc Aarons
You may have seen that the U.S. economy contracted at an annualized rate of 0.3% in the first quarter of 2025. Given that this is the first decline in nearly three years, I wanted to offer some helpful context and an overview of a few important considerations.
There were a few key contributions to the decline, including:
- Import surge – Imports jumped more than 40% as goods purchases surged ahead of expected tariff-induced price hikes. This widened the trade deficit and pulled GDP lower.
- Government spending – Federal and state expenditures declined, reflecting policy and budget shifts. These catalysts contributed to the downward movement in GDP.
Still, there were some encouraging signs:
- Consumer spending – This grew by 1.8%, showing continued resilience, though slower than last quarter.
- Business investment – Nonresidential investment rose 9.8%, including a 22.5% increase in equipment purchases, indicating business confidence.
- Disposable income – This increased by 2.7%, giving consumers a bit more room in their budgets.
Does This Mean Recession?
- Well, it depends who you ask – One definition of recession is two consecutive quarters of negative GDP growth. Here, we have only one quarter. Additionally, other opinions exist regarding the two-quarter metric, with some saying even having two quarters of negative growth doesn’t mean there’s been a recession.
- Remember 2022 – A good example of this: We had two consecutive quarters of negative GDP in 2022, and some economists disagree about whether we experienced a recession.
- Pre-Tariff Import Surge – A flurry of buying from businesses and consumers was expected by many to negatively affect GDP ahead of tariff-fueled pricing. So, the weak data print was not a total shocker, perhaps evidenced in part by the market reaction as the trading session progressed on April 30th. After the news came out, the S&P 500 recovered from a 2% drop to settle around 0.1% higher for the day. Some analysts have said in the past that imports may not reduce economic growth.
- Are We in a Recession Now? – By the conventional definition of a recession, no. Although fears of one are rising. But fear is the same emotion that some investors succumbed to earlier in April or in March of 2020 — and think of how the market fared in the years after. Moreover, we could just have one negative quarter of GDP growth attributable to tariff fears. More data and time are needed to come to a conclusion.
Looking ahead, nobody knows for sure about the direction of GDP and the impacts of tariffs. However, it is logical to say that the surge in imports before tariffs contributed to price hikes was a catalyst for the negative GDP growth in the first quarter. We will see what GDP does in Q2 after the tariff-driven spike in imports subsides.
With that said, if you’d like to talk about what this could mean for your financial plans in the second half of 2025, reach out — I’m here to help however I can.
Please don’t hesitate to reach out with any questions or concerns.
Marc Aarons may be reached at 714-887-8000 or Email Marc
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