GDP Falls in '25Q1: Report reveals both real risks and underlying strength.

Prices and imports spike, but so does investment. Punchline: there's still time to fix this, Mr. President. But you need to quickly mend your ways.

The U.S. economy contracted at annualized rate of 0.3% in the first quarter of the year, a big step down from +2.4% in the previous quarter.¹ This is the first quarterly decline in real GDP since 2022Q1, and it was below expectations for +0.2%.

I’ll get into the guts in a moment. It’s always tricky to pull signal from noise in these reports, and this one’s trickier than usual, with conflicting signs of both underlying strength (stronger-than-expected investment spending) and weakness (negative net exports and inventories; a bigger jump in inflation than expected).

But the question on everyone’s mind today will likely be: does this report provide confirmation that Trump’s economic agenda is responsible for tanking the economy? The answer is not yet, but there are signs that point in that unfortunate direction. In that regard, the message from this report is very much akin to the sign in the woods in a horror movie: Turn Back Before It’s Too Late!

Why does a sudden contraction of this magnitude not confirm that the trade war, Fed harassment, DOGE chaos, and uncertainty-inducing-policy-lurching killed the heretofore healthy expansion that Trump inherited from Biden?

First, remember that the big tariff reveal occurred after the quarter ended, on April 2. That said, there’s clear evidence in this and other reports (e.g., the spike in car sales we saw in March retail sales) that consumers and businesses have been reacting to higher tariffs—some of which were in place last quarter—by pulling forward purchases from abroad (see below on goods imports in today’s report).

Second, to the extent that frontrunning tariffs was in play, that could mean more imports now, less later. Imports are a subtraction from GDP, necessary to avoid double counting. Because it measures “domestic” production, a purchase of a foreign car that shows up in consumer spending gets netted out by the negative imports term. Because of the frontrunning purchases, there could be fewer subtractions in forthcoming reports, but also less spending overall, as all this frontrunning snaps back.

Third, these data are incomplete. Today’s release is called the “advanced” estimate and it will be updated with more complete data. The statisticians who build this estimate lack data from March (the last month of the quarter) on trade, inventories, and services spending, all of which are particularly salient right now.

Fourth, one-quarter does not a new trend make.

The table below shows the big swing from over the last two quarters by the contributions of the big components of the GDP aggregate: consumer spending, investment, net exports, and government spending, which sum to the total growth rate (note that these are percentage point contributions, not growth rates). The addendum point, explained below, is important (this one is a growth rate).

Consumer spending gets the heaviest weight of all the components, accounting for almost 70% of nominal GDP. After growing by a strong 4% in ‘24q4, it was up 1.8% in today’s report. It’s contribution thus fell from 2.7 percentage points to 1.2.

Investment in both business and residential, but the former is of great interest right now due to concerns about the trade war et al on investment plans. It was surprising solid over the quarter.

One good way to amp up the signal in these reports is to look solely at consumer spending and investment, leaving out noisy inventories (in the GDP accounts, this is called final sales to private domestic purchasers, included at the bottom of the table). Analogous to core inflation, this measure can deliver better info on GDP’s underlying trend growth. It held up strongly in the last two quarters, growing around 3%, suggesting there may still be time to roll back back destructive policies and preserve the expansion.

Net exports were a large negative contributor, due to a large spike in goods imports of over $300 billion. This component alone subtracted almost 5 ppts from Q1 GDP, the second largest negative spike on record.

Government spending was also a negative contributor, subtracting a quarter point from growth.

Another negative in today’s report was the increase inflation, which came in hotter than expected. Consumer inflation was up 3.6%, annualized in Q1, with hefty contributions from both goods, which had been pretty flat lately, and services, which were up a discomfortingly warm 4.2%. We’ll see if this sticks, and later this morning we’ll get information about March inflation. But this could reflect early price-pressures from tariffs (as the ECI number I report below suggests, it doesn’t appear to coming from wage pressures).

Let’s close out with a few Q&A’s.

—Is the U.S. economy in recession? It is not. Informally, it takes two quarters of contraction before a recession is called, and the formal declaration takes longer and is based on a wide variety of data. For all the reasons articulated above, we’re not there yet. We might not get there, but there’s more than enough in this report to raise that probability, especially when you add in all the Trump-induced economic angst among businesses and households. For now, however, especially considering that 3% “core” rate, there’s no recession upon us.

—Is this negative print all Trump’s fault? Again, nope. As I’ve unequivocally stressed, his cheeseburger-chomping fingerprints are all over it, but there’s a number embedded deep in the weeds that we should be careful about linking to Trump. In January, a month when Trump mostly wasn’t president, consumer spending tanked big-time, down 0.6% real for the month. For technical reasons (see here if you dare), January gets a heavy weight in the Q1 calculation, so arguably, that’s not a Trump effect.

Unless it is. As no less than Ernie Tedeschi reminded me yesterday, goods consumption spiked after Trump was elected but before he took office (Nov/Dec), which may have contributed to the weak January. But that just means you should average over those months. If you do that, real consumer spending over the past six months is 2.9%, a decent growth rate.

—So, what are you most concerned about in this report? I’m most concerned about the topline number: that -0.3% which is such a sharp decline from the rates we were posting before Trump got here.

With all that back-and-forth, I know I just reminded you why presidents have been known to yell, “Bring me a one-handed economist!” But there’s always a lot of fog at potential turning points, and the GDP advanced estimate, as noted, is built off incomplete data. However, I’ve been unequivocal in connecting a lot of what we’re seeing in this report to the clearly negative Trump economic agenda. If they don’t quickly and radically change course, for which the odds are very low, the worst aspects of this report, along with the price pressures, could become far too familiar to us. And as I stressed earlier in the week, it doesn’t take a recession to lead to upward pressure on unemployment. It just takes consecutive quarters of subpar growth. For now, we have one such quarter.

ECI Wage Report

This report, for Q1, was also released this morning. Nominal compensation was up 0.9%, right at expectations (3.6% yr/yr). I’ll dig more into the guts later, but this is good news from the perspective of the Fed, which gives this series heavy weight in determining their next interest rate move. They would consider this pace of wage growth to be non-inflationary, which, especially given their challenge dealing with the stagflationary impact of tariffs—they slow growth but raise inflation—should be welcome news to them.

It’s also the case that consumer inflation over this period was up 0.6%, so real ECI compensation grew in Q1 by 0.3% and by 1.2% yr/yr.

1. In U.S. data, quarterly growth rates are usually measured as “annualized,” meaning this is what the percent change in real GDP (in this case) would be if the first quarter’s growth rate persisted for four quarters. Confusingly, the ECI wage report, which I briefly discuss later in this post, is presented in non-annualized form.