The US economy shrank slightly less in the beginning of the year than previously reported, new data shows, but it was still the first quarterly decline since 2022, in a sign of how President Donald Trump’s chaotic and aggressive tariff regime is affecting American consumers and businesses.
Gross domestic product, which captures all the goods and services produced in the economy, registered an annualized rate of -0.2% in the first quarter, according to the Commerce Department’s second estimate released Thursday. An initial estimate showed that GDP fell 0.3%.
Trump’s tariffs have prompted American companies and consumers to pull forward purchases to get ahead of any sticker shock stemming from the duties, which has sent imports surging. But a federal court’s ruling late Wednesday has thrown Trump’s entire trade policy into question.
Still, Trump’s trade war is far from over. His administration appealed Wednesday’s ruling from the three-judge panel at the US Court of International Trade in Manhattan. Uncertainty stemming from Trump’s policies is expected to persist, but there are also questions over the underlying health of the US economy.
The latest GDP data isn’t quelling those fears: A key gauge of demand in the economy — referred to as real final sales to private domestic purchasers — was revised down by a sizable half percentage-point for the first quarter. Consumer spending, the lifeblood of the US economy, was also revised lower, factoring in weaker spending on food, cars and financial services.
An upward revision to private inventory investment — specifically by nondurable goods manufacturers and companies in the information industry — offset those new weaker figures.
Americans remain uneasy over the chaotic and erratic rollout of Trump’s tariffs, but the jury is still out on whether consumers will continue to spend, or tighten their belt.
In recent years, pessimism about the economy hasn’t led to weaker spending, as happened in 2022 and 2023, when consumers fretted over high inflation and a standoff in Congress about the debt ceiling. The latest consumer surveys show that people’s attitudes toward the economy remain in the doldrums.
The strength of consumer spending is closely tied to the health of the labor market. Top policymakers at the Federal Reserve fear unemployment could soon pick up, especially if Trump’s trade war spirals out of control.
Fed officials “assessed that there was a risk that the labor market would weaken in coming months,” according to minutes from the central bank’s policy meeting earlier this month, with some noting that “their contacts and business survey respondents reported limiting or pausing hiring because of elevated uncertainty.”
So far, there haven’t been any cracks in America’s long-robust labor market, with employers continuing to add jobs at a brisk pace and unemployment remaining relatively low.
But if the labor market does deteriorate, that won’t bode well for consumer spending, which powers two-thirds of the US economy. And Americans stretching themselves to pull forward purchases to beat Trump’s tariffs means the economy would be in a vulnerable position if the job market ever begins to falter.
“If you think appliance and vehicle prices are going to rise, you might accelerate your plans, but if you don’t have the cash for these purchases, relying on credit could be risky during uncertain times,” Elizabeth Renter, senior economist at NerdWallet, said in an analyst note Thursday.
“Newly delinquent credit accounts are on the rise, so in addition to anticipating the effects of new economic policies on prices, we’ll want to keep an eye on the potential impact to household debt management,” she said.
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