US Economy Shrinks in Trump Tariff Shadow with Stagflation Fear

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US Economy Shrinks for First Time in Three Years Amid Trump Tariff Fallout, Experts Warn of Stagflation

By S Jha

Mumbai, May 1, 2025 – The US economy contracted by 0.3% in the first quarter of 2025, marking its first decline since 2022, driven by a surge in imports and reduced government spending, according to the Commerce Department’s Bureau of Economic Analysis.

The downturn, a sharp reversal from the 2.4% growth in Q4 2024, sparked fears of stagflation and recession. Experts blasted the disruption to President Donald Trump’s aggressive tariff policies.

The GDP contraction was primarily fueled by a 41.3% surge in imports, as businesses rushed to stockpile goods ahead of Trump’s tariffs, which include a 145% levy on Chinese imports. This widened the trade deficit to a record $162 billion in March, subtracting nearly 5% from GDP growth.

Federal government spending also fell 5.1%, with defence spending dropping 8%. Despite these drags, consumer spending grew at a modest 1.8%, and business investment surged 9.8%, signaling underlying resilience.

Experts sounded alarms over the economic outlook. Mark Zandi, chief economist at Moody’s Analytics, posted on X, “Tariff wars, DOGE cuts to jobs and government programs, and deportations are sowing confusion, which puts a pall on investment, hiring, and spending… Lawmakers need to get it together soon, or the economy will go from gagging to choking.”

Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, called the GDP report a “stagflation warning shot over the bow of the economy,” citing stagnant growth alongside accelerating inflation, with the core PCE index rising 3.5% in Q1.

Apollo Asset Management’s Torsten Slok warned of a potential downturn by summer, telling CNBC, “The consequence will be empty shelves in US stores in a few weeks and Covid-like shortages for consumers and firms using Chinese products as intermediate goods.” On X, @OopsGuess highlighted the pre-emptive damage: “Tariffs didn’t need to start. The fear of tariffs already wrecked Q1. The worst is yet to come.”

Trump deflected blame, posting on Truth Social, “This is Biden’s Stock Market, not Trump’s… Tariffs will soon start kicking in, and companies are starting to move into the USA in record numbers. Our Country will boom, but we have to get rid of the Biden ‘Overhang.’”

However, critics like Senate Democratic Leader Chuck Schumer accused Trump of “running the country into the ground,” urging him to reverse course.

While some economists, like Ryan Sweet of Oxford Economics, noted that “real final sales to private domestic purchasers, the engine of the economy, posted a decent gain” at 3%, they warned of future risks. Sweet added, “The economy was essentially stagnant… while growth in headline and core inflation accelerated, fanning concerns of stagflation.”

PNC’s Gus Faucher told Yahoo Finance, “Trade was a huge influence… but underlying demand consumer spending growth was still pretty solid.”

Despite the contraction, the National Bureau of Economic Research has not declared a recession, which typically requires two consecutive quarters of negative growth. Economists anticipate a possible rebound in Q2 as import surges ease, but persistent tariff uncertainty and inflation could push the economy toward stagnation or worse.

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