The U.S. economy shrank by 0.3% in the first quarter of 2025, sparking fears of a recession. President Donald Trump blamed the contraction on the previous Biden administration, while analysts pointed to Trump’s trade war as the cause. Despite the decline, consumer spending rose 1.8% in Q1, following a 4% growth in Q4 2024.
Business investment also showed positive trends, with private domestic investment up 21.9%. The perceived strength of Q1 might have been bolstered by consumers making purchases before tariffs took effect. This could lead to inflation in the coming months as prices on foreign goods rise, potentially deterring spending or straining consumer budgets.
The Federal Reserve maintained its target interest rate range between 4.25% and 4.5%, acknowledging the complex economic outlook.
Trade war impacts economic outlook
The U.S. added 177,000 nonfarm jobs in April, surpassing expectations.
The trade war with China shows no sign of abating, while conflicts with Canada and Mexico have a different dynamic. Canada, which depends on the U.S. for exports and national security, finds itself more vulnerable to tariffs. Canadian Prime Minister Mark Carney visited Washington to mend trade relations.
Despite Trump’s harsh rhetoric, the meeting ended positively, with both leaders expressing a commitment to maintaining amicable relations. While the U.S. economy faces challenges and uncertainties, key indicators suggest it remains fundamentally solid for now. The evolving trade dynamics and Federal Reserve actions will be crucial to watch in the coming months.