US economy shrank 0.5% in the first quarter, worse than earlier estimates had revealed

The U.S. economy contracted by 0.5% in Q1, a steeper decline than previously estimated and the first contraction in three years, primarily due to a surge in imports ahead of anticipated tariffs and a sharp slowdown in consumer spending. This downturn, attributed to trade policy impacts, is further underscored by worsening consumer confidence, with a key short-term expectations index falling below recession-signaling levels. While economists project a Q2 rebound, the data highlights growing economic uncertainty and potential underlying weakness.

Analysis

The U.S. economy contracted by 0.5% in the first quarter, a more severe decline than the 0.2% previously estimated and a stark reversal from the 2.4% growth seen in Q4 2024. This marks the first economic contraction in three years. The downturn was primarily driven by a 37.9% surge in imports, the fastest pace since 2020, which subtracted 4.7 percentage points from GDP as businesses and consumers front-loaded purchases ahead of anticipated tariffs. More fundamentally, the data reveals significant weakness in consumer activity, with spending growth slowing sharply to just 0.5% from 4.0% in the previous quarter. This consumer retrenchment is underscored by a decline in the Conference Board's consumer confidence index to 93 in June, with its short-term expectations component falling to 69, a level that historically can signal a recession. Even a core measure of underlying economic strength, which excludes volatile trade and inventory effects, decelerated to a 1.9% growth rate from 2.9% in Q4, indicating a broader loss of momentum. While economists surveyed by FactSet anticipate a Q2 rebound to 3% growth, the combination of downward revisions, falling confidence, and slowing core growth points to heightened economic uncertainty.

Key Decisions for Investors

• Given that the headline GDP contraction was heavily influenced by a one-off import surge, investors should prioritize the upcoming Q2 GDP report on July 30 for confirmation of the expected rebound; a miss would be a significant bearish catalyst.
• The sharp slowdown in consumer spending and the decline in confidence to near-recessionary signal levels warrant a review of exposure to cyclical sectors, potentially favoring more defensive positioning until consumer health shows clear signs of stabilization.
• As trade policy is the primary driver of the reported volatility, investors should remain highly attentive to tariff developments, as these actions directly impact both corporate behavior and consumer sentiment, posing a key risk to the economic outlook.