Market Update: U.S. economy shrank as consumers went on pre-tariff buying spree – Full Analysis

Gross domestic product is the standard measure of a country’s economic growth. It is the sum of consumption, investment, government spending and the balance of trade, defined as exports minus imports.  

In most circumstances, advanced economies like the U.S. try to aim for GDP of around 2% to 3% per quarter, adjusted for inflation. The U.S. has been doing slightly better than 2% for the past two years — and until Trump began his tariffs rollout, it was expected to have performed at about that pace. 

But shock over Trump’s tariffs has begun to rattle economic data. On Tuesday, the Commerce Department reported the U.S. trade deficit in merchandise unexpectedly widened in March to an all-time high as companies began ramping up imports to get ahead of Trump’s import duties. 

Having a large volume of imports that results in a trade deficit does not necessarily signal economic weakness, assuming the imports are balanced out by consumption and investment. Although the U.S. has been operating at historically wide trade deficits for many years, they have not substantially affected GDP performance. 

But the latest surge in imports likely swamped the ability of the rest of the economy to absorb them in the short term, something that would result in lower GDP.  

Still, the measurement does not reflect overall consumer and business performance, analysts with Morgan Stanley wrote in a note to clients.  

“It’s important to note that this reflects front-running and not current economic weakness,” they wrote. 

What about the rest of the economy? Analysts say consumption and investment likely slowed but did not reverse. 

“The story, in our view, is one of a US economy that exited the first quarter on solid footing,” the Morgan Stanley analysts said.  

Analysts with JP Morgan note that if Q1 GDP is unexpectedly weak, Q2 GDP could be unexpectedly strong. 

“If imports collapse in coming months, there will be a temporary bounceback in measured GDP in 2Q,” they wrote in a note.

CORRECTION (May 1, 2025, 2:35 p.m. ET): A previous version of this article misstated in a headline of the chart how the changes in GDP will be tracked. The chart has been updated using the percentage change in GDP from the previous quarter, not year over year.