What’s going on here? The US economy unexpectedly shrank by 0.3% in the first quarter of 2025, marking the first contraction since 2022. Trade tensions and tariffs are playing a significant role in this downturn.

What does this mean? After a strong 2.4% GDP growth in the final quarter of 2024, the US economy hit a snag. The downturn is largely due to increased imports, reduced government expenditures, and a slowdown in consumer spending growth from 4% to 1.8%.

While this contraction might be temporary, ongoing trade issues add a layer of uncertainty. Tariffs, especially on Chinese goods, may further strain the economy, despite a temporary pause for certain countries. Inflation pressures are rising, with the PCE price index up 3.6% in Q1, its fastest pace since recent figures.

Consumer spending saw gains before tariff implementations, notably in auto sales, but experts caution that these gains might be short-lived as tariffs take hold. Why should I care? For markets: Trade tensions test investor nerves.

The stock market is facing instability amidst tariff policies. While sectors like autos saw initial improvements pre-tariff, the overall market is apprehensive about prolonged trade conflicts. As tariffs potentially increase, investors need to monitor sectors heavily influenced by global trade dynamics.

The bigger picture: Balancing growth and inflation. With inflation rising quicker than anticipated, the Federal Reserve’s task of balancing growth and inflation control becomes critical. As the core PCE inflation aligns with projections at 2.6% in March, the Fed needs to carefully steer through these domestic and international trade challenges.