Investors Worried: US Economy Shrinks & Tariff Impact Not Fully Absorbed!

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US gross domestic product (GDP) shrank by 0.5% annually in the first quarter of this year, according to a final revision of data released on Thursday. This confirmed the first contraction since 2022 and signaled possible economic pressure from the US government’s massive tariff implementation.


In the previously revised figures released in May, GDP for January to March was recorded to have shrunk by 0.2%, compared with 2.4% growth in the last three months of 2024.


A surge in imports driven by companies rushing to place early orders to avoid higher costs before President Donald Trump’s aggressive trade policies also weighed on growth figures. According to the US Department of Commerce’s Bureau of Economic Analysis, imports are counted as a deduction in the GDP calculation.


Reduced government spending also weighed on growth, although it was partially offset by investment and consumer spending that remained strong.


The 0.3 percentage point decline in the final GDP figure was due to downward revisions to consumer spending and exports, the BEA said. However, downward revisions to import figures helped to reduce the overall negative impact.


While the initial wave of “tariffs” has now subsided and inflation and labor market data point to modest trade impacts, concerns remain that the full impact of Trump’s tariffs has not yet been fully felt. Many economists have warned that the tariffs could increase inflationary pressures and slow economic activity overall.


In a recent note, Barclays analysts expect the impact of these tariff policies to be felt across the global economy by the second half of 2025. Meanwhile, Federal Reserve Chairman Jerome Powell this week reiterated his “wait and see” stance on any interest rate changes until there is more certainty about the impact of the tariffs.


In a separate report on Thursday, weekly claims for initial jobless benefits fell less than expected to 236,000, while the four-week moving average used to filter weekly fluctuations edged down slightly. However, the number of continuing claims jumped by 37,000 to 1.974 million, the highest since November 2021.


“The combination of these numbers suggests that while companies are not aggressively reducing their workforces, the pace of hiring has slowed,” Vital Knowledge analysts said in a note.


Investors are now focusing on the personal consumption expenditures price index, due out on Friday, for an updated picture of the level of U.S. inflation. The indicator is the Federal Reserve’s preferred measure of price increases.

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