The U.S. economy shrank by 0.3% in the first quarter of 2025, marking the first economic contraction in nearly three years and sparking new concerns about a potential slowdown. The decline was largely driven by a record surge in imports, as companies rushed to stock up on goods ahead of new tariffs imposed by the Trump administration.

This sharp increase in imports significantly widened the trade deficit, offsetting gains in domestic production. Consumer spending, a key engine of the economy, also showed signs of cooling, growing at just 1.8%—down from 3.7% in the final quarter of 2024. Business investment appeared strong, but much of that was attributed to preemptive inventory stockpiling rather than long-term confidence.

Government spending declined as well, reflecting recent federal budget cuts and layoffs. Inflation ticked up to 3.6%, although more recent data suggests a moderation to 2.5%.

While the Federal Reserve is expected to hold interest rates steady in the near term, the surprise GDP drop adds complexity to its policy outlook as officials assess the growing economic risks tied to trade uncertainty.

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