The U.S. economy shrank slightly in the first quarter of the year amid disruptions to global trade and government employment and spending.

Gross domestic product (GDP) from January through March contracted at an annualized rate of 0.3 percent, according to the Bureau of Economic Analysis. The economy grew by 2.4 percent in the fourth quarter of 2024.

“The decrease in real GDP in the first quarter primarily reflected an increase in imports, which are a subtraction in the calculation of GDP, and a decrease in government spending,” the bureau stated. “These movements were partly offset by increases in investment, consumer spending, and exports.”

Businesses increased their imports of products and materials during Q1 in anticipation of the Trump administration imposing higher tariffs.

Notwithstanding the negative growth, the labor market has remained healthy, with the economy adding 177,000 jobs in April while the unemployment rate remained at 4.2 percent, the Bureau of Labor Statistics reported. Significant job gains were noted in the health care, transportation and warehousing, financial activities, and social assistance sectors, while federal government employment, unsurprisingly, decreased.

Inflation has not been as much of a concern as had been feared, at least not yet. The bureau reported that the Consumer Price Index increased by just 0.2 percent from March to April and that April prices were 2.3 percent higher than a year earlier, nearly in line with the Federal Reserve’s goal of 2 percent, which has been unattainable in recent years.

The Fed, notwithstanding the lowest inflation rate since February 2021 and the economic slowdown – which it attributed to a trade aberration, not systemic weakness – announced on May 7 that it would keep interest rates unchanged. The target range for the Federal Funds Rate has been 4.25-4.5 percent since December of last year.

“Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace,” the Fed stated. “The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated.”

The April inflation rate of 2.3 percent was announced a week later.

The central bank appeared to warn of stagflation later in its announcement. The Fed’s Federal Open Market Committee is directed by Congress to implement monetary policy that promotes both maximum employment and stable prices and, in announcing its decision concerning interest rates, it routinely includes boilerplate language stating, “The Committee is attentive to the risks to both sides of its dual mandate.”

In recent months, it has, on some occasions, added, “The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance.” In May, however, it said that it “judges that the risks of higher unemployment and higher inflation have risen.” This is the first time in recent memory that it has warned of higher unemployment, which might indicate a coming rate reduction to spur economic growth, if not for the simultaneous concern over higher inflation.

If both unemployment and inflation increase, the Fed – and the economy – would face a dilemma not seen since the malaise of the late 1970s and early 1980s.

JPMorgan Chase CEO Jamie Dimon echoed those concerns, suggesting during his bank’s Investor Day on May 19 that the chances of stagflation are likely double what is commonly being predicted. Dimon pointed to the Trump administration’s (mostly) on-again, (occasionally) off-again tariff plans as a primary cause of economic uncertainty.

“Even at these low levels, if they stay where they are today, [these are] pretty extreme tariffs,” Dimon said. “And you also don’t know how every country is going to respond.”

President Trump in May announced what amounts to a truce with his biggest trade war foe, as the United States and China agreed to roll back their escalating tariffs for at least 90 days.

In another potentially disruptive event, though, Moody’s downgraded the United States’ credit one notch from the highest rating of Aaa to Aa1. The nation’s two other major credit rating agencies, S&P and Fitch, had already stripped the country of the top credit rating in 2011 and 2023, respectively.

The move by Moody’s, which was largely based on the size of the ever-growing national debt, could increase borrowing costs for the federal government.

The Conference Board’s Consumer Confidence Index plummeted to its lowest level since the start of the pandemic. The index fell more than 8 percent in April, marking the fifth monthly decline in a row.

“The three expectation components – business conditions, employment prospects, and future income – all deteriorated sharply, reflecting pervasive pessimism about the future,” the board’s senior economist, global indicators, said. “Notably, the share of consumers expecting fewer jobs in the next six months (32.1 percent) was nearly as high as in April 2009, in the middle of the Great Recession. In addition, expectations about future income prospects turned clearly negative for the first time in five years, suggesting that concerns about the economy have now spread to consumers worrying about their own personal situations.”

Another measure of consumer confidence, the University of Michigan’s Index of Consumer Sentiment, decreased 2.7 percent from April to May. While the month-to-month decrease was not dramatic, the index is now 26.5 percent lower than it was in May 2024.

“Tariffs were spontaneously mentioned by nearly three-quarters of consumers, up from almost 60 percent in April,” the director of the university’s Surveys of Consumers said. “Uncertainty over trade policy continues to dominate consumers’ thinking about the economy.”

Confidence on the supplier side also appears weak, with the Institute for Supply Management’s Purchasing Managers Index dipping slightly from March to April and coming in at a level indicating contraction in the manufacturing sector for the 10^th time in the last 12 months.

“Demand and production retreated and de-staffing continued, as panelists’ companies responded to an unknown economic environment,” the chair of the institute’s Manufacturing Business Survey Committee said. “Price growth accelerated slightly due to tariffs, causing new order placement backlogs, supplier delivery slowdowns and manufacturing inventory growth.”

Housing starts in April were 1.6 percent higher than in March and 1.7 percent lower than in April 2024, according to the Census Bureau and the Department of Housing and Urban Development. Existing home sales dipped 0.5 percent from March to April, the National Association of Realtors reported.

“Home sales have been at 75 percent of normal or pre-pandemic activity for the past three years, even with seven million jobs added to the economy,” the association’s chief economist said. “Pent-up housing demand continues to grow, though not realized. Any meaningful decline in mortgage rates will help release this demand.”

The National Association of Home Builders/Wells Fargo Housing Market Index fell 15 percent from April to May, and the index found that 34 percent of builders reduced home prices in May, the highest level since December 2023.

The Dow Jones Industrial Average closed at 41,603.07 on May 23, down 4.3 percent since Trump became president. The S&P 500 Index ended the day at 5,802.82, recording a 3.2 percent loss since the inauguration.

The dollar on May 23 was trading at 0.88 euros, 0.74 pounds, 142.57 yen and 7.18 yuan.