The US economy likely just had its worst quarter since Covid

By Bryan Mena, CNN

Washington (CNN) — President Donald Trump’s major, abrupt policy shifts likely slowed the US economy sharply in the beginning of the year — for the worst quarter perhaps since the Covid-19 pandemic — as consumers and businesses fretted about massive new tariffs.

The Commerce Department is set to release its initial estimate of first-quarter gross domestic product, the broadest measure of economic output, on Wednesday at 8:30 am ET. It will give the clearest picture yet of how the US economy is responding to Trump’s sweeping economic agenda, just one day after the administration’s 100th day in power.

Economists estimate that GDP expanded at an annualized rate of 0.8% in the first quarter, adjusting for inflation and seasonal swings, according financial data firm FactSet, which would be the weakest rate since the second quarter of 2022. The Federal Reserve Bank of Atlanta, meanwhile, is forecasting a sharp decline of 2.5%, which would mark the worst quarter since mid-2020.

GDP likely slowed due to higher imports as American consumers and businesses rushed to beat Trump’s tariffs (when imports exceed exports, that subtracts from GDP); weaker spending early in the quarter as unusually harsh cold weather kept shoppers hunkered down; and companies pausing investments over uncertainty stemming from Trump’s policies, among other factors.

“There’s a lot of noise in the data from storms, people front-loading and some payback for the strength in the fourth quarter,” Nathan Sheets, global chief economists at Citigroup, told CNN. “But you’ve got this economic concern from how tariffs are going to affect the economy and markets that people are really struggling with.”

A higher trade deficit

The Trump administration has been on a chaotic tariff spree over the past few months to address a massive trade deficit that Trump has referred to as a “national emergency” — and the deficit has actually gotten worse in recent months.

So far, Trump has levied 25% tariffs on aluminum and steel; 25% tariffs on goods from Mexico and Canada that aren’t compliant with a free-trade agreement among the countries; a staggering 145% duty on Chinese imports; a 25% tariff on cars, with separate tariffs on auto parts coming at a later date; and a 10% baseline tariffs on all US imports.

A massive tariff hike on dozens of countries briefly went into effect on April 9, though Trump swiftly delayed that hike that same day until July. He also introduced temporary exemptions for some electronic goods, and he has said separate tariffs are likely coming down the pike on semiconductors, pharmaceuticals, copper and timber.

China has retaliated at every juncture, jacking up its tariffs on US imports to a bruising 125%, though Trump has hinted at a potential U-turn in his trade spat with the world’s second largest economy. The European Union and Canada have also vowed to fight back against the US tariffs.

America’s trade deficit, meanwhile, got worse in the first 100 days of Trump’s second term, according to government data. In January, the trade deficit ballooned 34% to $130.6 billion, the largest on records going back to 1994. The deficit shrunk to $122.7 billion in February, according to the latest data, but that was still the second-biggest trade deficit ever. (Trump took office on January 20, so the data for that month also reflects the end of the Biden administration.)

“If you look at what drove the widening in the trade deficit, it was mostly industrial supplies and consumer goods, durable items that aren’t perishable,” said Nicole Cervi, an economist at Wells Fargo.

How consumers and businesses spent

American consumers and businesses overwhelmingly power the US economy with their spending, and economists say there were signs that spending was sputtering in the first quarter.

Trump’s unpredictable trade war has significantly weighed on America’s economic mood in recent months, according to various sentiment surveys, jeopardizing consumer demand moving forward.

For consumers, much of the first-quarter spending weakness came near the start of the year, mostly due to unusually harsh cold weather and wildfires in Los Angeles, according to economists. In January, spending on goods and services declined 0.3%, while retail sales saw an even steeper decline of 0.9%, according to Commerce Department data. Spending made a weaker-than-expected recovery in February.

Then in March, retail sales skyrocketed at the strongest monthly pace in more than two years as Americans rushed to get ahead of Trump’s tariffs, driven mostly by spending on cars and auto parts. However, that boost will likely prove temporary.

On the business side, recent surveys from the US-based nonprofit Institute for Supply Management have similarly shown that businesses are feeling uneasy over Trump’s policies in both the manufacturing and services sectors. That skittishness hasn’t translated into weaker business spending yet.

New orders for non-defense capital goods excluding aircraft — a closely watched proxy for business investment — declined 0.3% in February, then rose by a tepid 0.1% in March.

“There was a hint of softness” in those numbers, wrote Richard de Chazal, macro analyst at finance firm William Blair. Even though consumers and businesses were worried about Trump’s tariffs, business investment in March “held up well.”

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