Talk about a tariff last hurrah. America rushed to import goods in the first quarter of 2025 in advance of Donald Trump’s “Liberation Day,” and that was enough to put the economy into negative territory. Today’s GDP report shows the Q1 result at an annualized -0.3% rate of growth, but the import data buried otherwise mildly positive data.
NBC reported on the phenomenon rather straightforwardly:
The U.S. economy contracted 0.3% in the first quarter of 2025, the first negative reading since the Covid pandemic, according to an initial measurement by the Commerce Department.
The decline was fueled by a massive surge in imports. Consumer spending, meanwhile, climbed 1.8%, the weakest pace since mid-2023.
Economists were expecting gross domestic product (GDP) to have advanced 0.4% for the first three months of 2025, compared with 2.4% in the fourth quarter of 2024.
How much did imports increase in Q1? A whopping 41.3%, according to the initial estimate from the Bureau of Economic Analysis. Imported goods rose by 50.9%, and imported services rose more modestly at 8.6%. Imports always count as a negative in these reports, but their rise and fall are normally incremental. Prior to this quarter, the largest increase in imports over the last several years was 20.8% in 2021’s final quarter, but that got balanced out by a 25.5% in exports, which count positively toward GDP. This quarter, exports only increased by 1.8%, leaving a huge deficit that the rest of the economic activity couldn’t balance out.
In fact, it’s remarkable that the economy got as close to positive territory as it did. The BEA’s report includes this graph showing the annualized impact imports had on GDP this quarter:
According to the BEA, imports alone knocked five full points off of final GDP (specifically, 5.03 points). Had this been a normal month for imports and exports, the overall result may well have been fairly normal in the 3% range or higher.
So why did imports spike in Q1? American importers rushed to increase inventory before Trump’s Liberation Day tariffs could apply. That’s smart business, but it’s also risky business, since inventory carries heavier costs to wholesalers and retailers. It also presumes that Americans will consume those goods, which, as NBC News points out, wasn’t so much in evidence in Q1.
But even that needs a little context. Q1 numbers for consumer spending are normally soft, likely as a result of the normal holiday spending in the fourth quarter. The consumer-spending history shows this pattern, as do overall GDP numbers. Personal consumable expenditures (PCE) only increased by 1.8%, a definite slowdown in spending, but also about the same as in 2024’s first quarter (1.9%). In 2022 Q1, it was at 1.0% in a quarter that scored a -1.0% GDP, largely also because of an import/export imbalance.
This report has a significant bright spot in domestic investment, which rose by a whopping 21.9%. Why? Companies shifted capital into business expansion in the US, presumably for the same reason imports flooded the zone — the coming tariffs. Almost all of that increase came in the commercial sector; non-residential investment leaped by 9.8%, the biggest increase since 2023 Q2, and investment in equipment roared to a +22.5%, the best quarter in years. That indicates a lot of confidence in the economy long-term, as well as a shift in direction for supply chains, at least to some extent.
We also see another positive indicator in disposable personal income, which rose by 2.7% in Q1. That’s the best number since mid-2023 and an indicator of positive growth in the economy. That is worth watching in the long term, too.
The good news here is that Q2’s report will likely show a much more balanced import/export picture. Tariffs will hurt our exports too, but thanks to the massive pre-emptive purchasing shift in Q1, it might take a couple of quarters for imports to come back to normal levels. That may lead to deceptively positive GDP results over the next couple of quarters, but we have plenty of data with which to put those into proper context, too. Right now, the economy still looks strong, even with the import flood.
