The U.S. economy contracted—or declined—in the first quarter of 2025. This is the headline from government data released today.
Let’s not panic. There’s more to the data than just headlines. Several bright spots should give us hope that the administration is pushing ahead on positive economic agenda items that will help regular Americans, such as slashing the size of government.
Key Takeaways from the Report:
Real gross domestic product (GDP) decreased at an annual rate of 0.3% in the first quarter of 2025, the first contraction since the first quarter of 2022.
Real GDP rose in the fourth quarter of 2024 by 2.4%.
Consumer spending rose at a 1.8% pace in the first quarter, the smallest increase since mid-2023.
Government spending fell to -5.1% from 4% during the same period last year.
Here are 4 observations from the growth report:
The economy was slightly in contraction last quarter, according to this advance estimate on GDP data. That is concerning, but should not ring recession alarm bells because fundamental forces driving the economy are strong.
Hopefully, any contraction of overall economic activity could prove short-lived as new data confirms the economy actually grew.
Beyond just the headlines, there are positive forces in this report.
First, consumer spending is growing. Consumers are still spending, albeit at a slower pace than before. Consumer spending powers our economy by contributing about 70% of the U.S. economic growth.
Consumer behavior right now is hard to peg down. However, higher-earning households dominate spending today, splurging on luxury cars, vacations, purses, etc., and are propelling the economy.
Second, investments are growing. Business investment rose 21.9% in the first quarter of 2025 after falling 5.6% in the fourth quarter of 2024, driven by massive equipment spending. This is likely due to companies getting ahead of expected cost increases from impending tariffs. However, we don’t know for certain that that was the only driver of business investment.
Third, core economic activity is growing. “Core GDP”—figures that reflect consumer spending and private investment — rose by 3%. This is slower than last year’s annualized growth, but not a contraction like the headline GDP number. Core GDP, like its cousin core inflation, offers a more accurate picture of economic growth because it strips out more turbulent economic factors such as the net between exports and imports.
Fourth, the government is shrinking. DOGE’s efforts to slash government spending are bearing fruit. Government spending tumbled over 5% as staffing, budgets, and property have been cut. This was the intention of DOGE.
Under the Biden Administration, government hiring and spending artificially propped up the economy. Now, the economic growth shifts back to where it should be, in the private sector.
How Tariffs Played a Role
Although President Trump’s widespread tariffs did not emerge until early April, the expectation of tariffs might have driven some of the investment by businesses and consumer spending in front-loading goods purchases.
A 41% surge in imports signals the concerns Americans have about the impact of tariffs on prices and supply. The import increase was driven by consumer goods, primarily pharmaceutical goods, medicines, and vitamins, and by capital goods like computers and parts.
There is fear, especially among consumers, that the tariffs will drive prices higher, even if that has yet to occur.
However, as Wall Street Journal writer Greg Ip explained:
For all the noise about tariffs, few have been passed through to customers yet. Retailers are for now trying to hold prices steady, perhaps hoping Trump, who has already announced pauses and exemptions for many tariffs, will go even further. If prices haven’t been affected, spending shouldn’t be, either.
Last month’s inflation report showed falling prices and real disinflation. That was excellent news. Unfortunately, it was overshadowed by fears of inflation and recession.
Lower prices motivated Americans to support President Trump last year and are important to their assessment of his first 100 days in office.
The White House touted new investments companies and nations are promising to make. That will take months and years to filter through the economy.
If administration negotiators are able to secure new trade agreements as soon as they’ve signaled, that could help alleviate the angst over tariffs and perhaps head off price increases.
Tariff concerns make tax cuts all the more important. Congress must make the expiring tax cuts permanent to provide households and businesses with certainty about the tax environment and provide a cushion to any possible price increases from tariffs.