The US economy contracted sharply at the start of 2025 than previously estimated, as weaker consumer spending and a widening trade deficit weighed heavily on overall growth. According to the Commerce Department’s third and final estimate released Thursday, gross domestic product (GDP) fell at an annualised rate of -0.5% between January and March, a steeper decline than the -0.2% reported in the second estimate.
The figure reflects the most comprehensive assessment of first-quarter economic activity, adjusted for inflation and seasonal patterns. The downward revision was driven largely by softer consumer spending, the engine of the U.S. economy. In the updated data, consumer expenditures rose by just 0.5%, a sharp downgrade from the previously reported 1.2%, and the slowest pace since 2020. The subdued demand points to growing caution among households in the face of economic uncertainty.
Trade deficit weighs on growth
The first quarter’s contraction also stemmed from a sizable trade imbalance. Businesses rushed to import goods early in the year to preempt steep tariffs implemented by the Trump administration, inflating import volumes while exports lagged behind. Although imports were slightly revised down in the latest estimate, they still far outpaced exports, dragging overall GDP lower.
Mixed economic signals from broader data
In addition to GDP, several other economic indicators released Thursday provided a fuller, though backward-looking, snapshot of the U.S. economy’s performance amid volatile policy shifts. A Labor Department report revealed that jobless claims rose, with the number of Americans receiving unemployment benefits for at least a week increasing by 37,000 to 1.974 million, the highest total since November 2021. The data suggests mounting challenges for unemployed workers trying to re-enter the labor force.
On a more positive note, durable goods orders surged 16.4% last month, driven largely by a jump in transportation equipment demand. The rebound followed a significant easing of trade tensions, as China slashed tariffs on U.S. exports from 125% to 10%, and the U.S. reduced its tariffs on Chinese goods from 145% to 30%. Notably, core capital goods orders rose 1.7% in May, recovering from a 1.4% drop in April. The uptick suggests a potential rebound in business confidence and investment heading into the second quarter.
Despite the mixed signals, the latest data may have limited impact on the Federal Reserve’s next move. Policymakers remain split over whether to resume interest rate cuts at their upcoming meeting, as they weigh persistent inflation concerns against signs of a slowing labor market and consumer spending. The second-quarter GDP report, due next month, will offer clearer insight into whether the economy is regaining momentum or continuing to lose steam amid ongoing trade and monetary policy uncertainties.