The U.S. economy contracted by 0.2% in the first quarter of 2023. This would be the economy’s first contraction in three years. This decline is a dramatic turn-around from the 2.4% growth in GDP we experienced in Q4 of 2024. It’s driven by current trade tensions and uncertainty caused by former President Donald Trump’s tariffs. These tariffs, imposed on countries all around the world, have massively undermined business certainty and investment plans.
During the Trump administration, a 10% tariff was placed on imports from dozens of countries. In addition, they created targeted tariffs on steel, aluminum, and cars. A recent federal court decision has stopped these tariffs in their tracks, especially those aimed at Canadian, Mexican and Chinese products. The court determined that Trump had exceeded his authority in implementing such measures, raising questions about the future of these trade policies.
What has happened is the uncertainty that the whole round of Trump’s tariffs created has made businesses change their business plans. One reason, firms stocked up a ton on inventories. This spending increase accounted for more than 2.6 percentage points of first-quarter GDP growth as governments stocked up ahead of anticipated tax increases. Stockpiling increased by an unprecedented amount. In a drastic reaction, imports surged, increasing at a blistering annualized rate of 42.6%. This is the fastest quarterly growth in imports since the third quarter of 2020. As a result, it precipitated a 5.4 percentage point decline in GDP growth.
Despite the collapse of the economy, non-residential business investment went through the roof. It shot up an incredible 24.4% just from January to March. This investment demonstrates businesses’ efforts to adapt to the changing economic landscape, driven in part by the looming tariffs. Federal government outlays fell 4.6% annualized—the largest decrease in three years. This record drop intensifies the storm clouds already gathering over the economy.
The court’s ruling to stop Trump’s tariffs has added new layers of uncertainty to an already complex economic picture. After reviewing the trade data, I asked IHS Markit analysts whether they think that record first-quarter import tsunami occurs again in the April-June half. Businesses were probably forced to stock up on foreign products in advance to avoid higher prices.
