In the first quarter of 2025, U.S. corporate profits experienced a decrease of $118.1 billion, following a substantial gain of $204.7 billion in the previous quarter, said the Commerce Department’s Bureau of Economic Analysis (BEA).
Simultaneously, the real gross domestic product (GDP) contracted at an annual rate of 0.2%, according to the second estimate, marking a stark contrast to the 2.4% growth observed in the fourth quarter of 2024.
BEA said:
“The downturn in real GDP in the first quarter primarily reflected an upturn in imports, a deceleration in consumer spending, and a downturn in government spending that were partly offset by upturns in investment and exports.”
Tariffs elevate business costs
The decline in corporate profits and GDP has been largely attributed to the increased costs faced by businesses due to the imposition of import tariffs.
These tariffs have introduced economic uncertainty, impacting both business operations and consumer sentiment.
The anticipation of tariff effects led to shifts in consumer and business behaviors, including accelerated imports and purchases.
Judicial intervention on tariffs
Adding to the economic complexity, a U.S. trade court recently ruled that President Donald Trump exceeded his constitutional authority by imposing broad tariffs on imports from trade partners.
The court determined that the Constitution grants Congress, not the president, the exclusive power to regulate international commerce, effectively blocking most of the administration’s tariff orders issued since January.
While this decision delivered a blow to Trump’s tariff-centered trade policy, the administration has filed an appeal.
Corporations and the Fed are cautious
The prevailing economic uncertainty has led several major companies, particularly in the airline and automotive sectors, to withdraw or withhold their financial guidance for 2025 and 2026.
Southwest Airlines, for instance, has pulled its guidance for both years, citing the current macroeconomic uncertainty.
Similarly, companies like Ford, Skechers USA, and United Parcel Service (UPS) have also retracted their earnings forecasts, reflecting the challenges in predicting future performance amid the ongoing tariff disputes and economic volatility.
In response to the evolving economic landscape, the Federal Reserve, during its May 6–7, 2025, meeting, acknowledged increased downside risks to employment and economic growth, alongside upside risks to inflation.
US Fed officials also have not ruled out the risk of the US economy going into a recession.
The Fed’s minutes indicated a cautious approach, emphasizing the need to wait for greater clarity on the economic outlook before making further policy adjustments.
Outlook
The combination of declining corporate profits, a contracting GDP, and the uncertainties surrounding tariff policies and legal rulings underscore the fragile state of the U.S. economy in early 2025.
Businesses and policymakers alike are navigating a complex environment, with the hope that forthcoming trade negotiations and clearer economic indicators will provide a more stable foundation for future growth.
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