Investing.com - The U.S. economy unexpectedly contracted in the first quarter, while consumer spending slowed, potentially indicating the impact of ongoing uncertainty around aggressive and erratic U.S. trade policies during the opening months of President Donald Trump’s second term in the White House.
U.S. gross domestic product, an indicator of growth in the world’s biggest economy, contracted by 0.3% during the January to March period, according to an advance estimate from the Commerce Department’s Bureau of Economic Analysis on Wednesday. In the fourth quarter, it had grown by 2.4%. Economists had predicted slight expansion of 0.2%.
A massive surge in imports, which are a substraction in the calculation of the GDP figure, primarily accounted for the decline, the BEA said. A drop in government spending -- which Paul Ashworth, Chief North America Economist at Capital Economics, linked to an Elon Musk-led drive to downsize the federal government -- also weighed on the number.
The spike in imports was the latest sign of a race by companies to lock in lower prices on imported goods ahead of the imposition of sweeping tariffs by Trump in early April. Ashworth said this increase "now appears to be going into reverse [...] and should boost second-quarter GDP."
Trump has since delayed for 90 days his elevated levies on most countries following deep ructions in stock and bond markets, and has shown a recent willingness to make concessions with specific industries.
Yet punishing tariffs of 145% on China -- and retaliatory levies of 125% by Beijing -- are still in place, as well as other duties on items like steel and aluminum. Trump has argued that the tariffs are necessary to reshore domestic manufacturing, boost government coffers, and correct perceived international trade imbalances.
But businesses have already flagged that the murky operating outlook caused by the tariffs may complicate their investment plans, while consumer confidence has begun to deteriorate.
Meanwhile, the first-quarter personal consumption expenditures price index, an inflation metric closely tracked by the Federal Reserve, accelerated to 3.5% from 2.6% in the October to December period.
"[T]he mix of the first-quarter data this morning was stagflationary," analysts at Vital Knowledge said in a note to clients, referring to an economic scenario where growth stagnates but inflation remains stubbornly higher.
Still, consumer spending, a key contributor to U.S. economic activity, was somewhat resilient, moving up by 1.8%. This was slower than the 4.0% increase in the fourth quarter, but faster than estimates of 1.2%.