The Economy Shrinks In Q1 Because Of Tariffs And Consumer Worries

There is a scramble among economists and analysts to explain the real annualized 0.3% decline in U.S. GDP. A slight contraction is the description, along with various explanations of why it happened and is likely to be temporary. Whether that is true or a form of professional and existential self-calming is to be seen.

What Happened To GDP In Q1

Economists originally expected the 0.3% fall in GDP to be a 0.4% gain — a swing of 0.7 percentage points. The fourth quarter of 2024 had realized an annualized gain of 2.4%. That was a swing of 2.7 percentage points.

Economists who examined the Bureau of Economic Analysis data generally chalked the drop up to a number of factors. One was a surge in imports. Many companies could easily see increased tariffs as upcoming costs that would ultimately require price increases on customer goods, so they placed extra orders for inventory and equipment ahead. Imports are deducted from GDP totals because they aren’t part of domestic production.

Companies weren’t alone in trying to head off upcoming price hikes. Consumers did as well.

Next came spending cuts and federal layoffs by Trump. It’s unclear what they amounted to alone, but they also led to 172,017 job cuts in February, according to outplacement consultancy Challenger, Gray & Christmas. It was the highest February total since 2009 and the highest monthly total since July 2020 during the pandemic, when 272,649 job cuts were announced.

Is This A Recession?

There is an old assumption that a recession is two consecutive quarters of negative GDP growth, but it isn’t accurate. It was part of a “rough translation” suggested in a December 1, 1975, New York Times op-ed by Julius Shiskin, then commissioner of the U.S. Bureau of Labor Statistics. The full translation was:

• two consecutive quarters of GDP decline
• a decline in industrial production over a six-month period
• 1.5% decline in real GDP
• 15% decline in nonfarm employment
• 2-percentage point increase in the unemployment rate to at least 6%,
• Decline in nonfarm employment in more than 75% of industries for six months or longer

More complex than the two-quarter rule of thumb that this is usually shortened to. Recessions are determined by the National Bureau of Economic Research. The organization calls it a “significant decline in economic activity that is spread across the economy and lasts more than a few months.” The determination is retrospective, waiting for enough data to determine whether the somewhat subjective criteria were met. Officially, no one will know for probably at least three months or more.

Does An Official Recession Designation Matter?

A lack of an official designation of a recession doesn’t matter if economic times are tough. The Biden administration frequently touted the strength of the economy even as many ordinary people said they couldn’t keep pace with rising prices. On Wednesday, Trump blamed the stock market on Biden, as Fox Business reported, even though the latter was president only through January 20, and the first quarter of 2025 that saw a contraction ended at the close of March.

Too much is uncertain at its foundation given the Trump administration’s policies, and that can have brutal repercussions.

“The Secretary of Commerce has stated multiple times that we were not going to put tariffs on anything we didn’t make because that didn’t make sense,” Giacomo Santangelo, a senior lecturer of economics at Fordham University, said during a phone call. He was explaining that Donald Trump, the Secretary of the Treasury, and the Secretary of Commerce can’t give the same explanation of what is happening with tariffs. “The purpose of this was to bring production back to the United States.”

Howard Lutnick, the Secretary of Commerce, “has said that the United States has trade deficits with every country in the world,” Santangelo noted. “But we have a trade surplus with Singapore. We have a trade surplus with Luxembourg. We have a trade surplus with the Netherlands.” The Motley Fool reported in early March that the U.S. had a goods trade deficit with 92 countries in 2024 and a surplus with 111 countries.

“The Secretary of the Treasury said there would be tariffs on everything coming into the United States and this will continue until we bring back manufacturing jobs, which would offset [cuts in] government jobs,” Santangelo continued. “Trump talks about bringing production back,” Santangelo added. So, what happens? “Apple says we’ll start making products in India. We’re going to raise all this money. Nobody is saying what we’re going to do with all this money we’re raising.”

And all the money from tariffs comes from businesses and consumers and is a form of domestic consumption tax.

Businesses and consumers typically react to economic uncertainty by restricting purchasing to avoid risk. That would mean a likely continuation of less spending in the second quarter of 2025 and potential additional GDP contraction, moving closer to an official declaration of a recession that many may feel is already here.